Originally published on Forbes.com.
The challenge of Samuel and Louise Edelman to the State of New York is a protest against double taxation. I covered it here last month and even came up with a workaround for people in their situation. I had a nice talk with Tom Corrie of Friedman LLP. He directs Friedman’s State and Local Tax Group (SALT). He threw cold water on my workaround and had some other great observations. I also have some more reflections on the issues.
The Issue
The beef that the Edelmans have is that they had to pay both Connecticut and New York income tax on the gain from the sale of their business (and probably some other income). They live in Connecticut, which is where their domicile (their true home) is. However, they also had an apartment in Manhattan in the years in question. That “place of abode” along with being in New York for at least a part of a day for more than 183 calendar days made them statutory residents.
Had they worked in Boston with a place in the North End, they would have been considered statutory residents of Massachusetts. But it would have been much less onerous, not only because Massachusetts has a lower rate, but also because of a 1996 multi-state agreement, to the effect that the state of statutory residence should credit taxes paid to the state of domicile on income not sourced to the statutory resident state.
The New York legislature did not follow through on the agreement, because, I guess, it is New York. If you make it there, they will take it there and if you are a statutory resident they will take it from everywhere.
My Solution
I put myself in the shoes of the Edelmans and thought about what I would do if I lived in say Greenwich, CT and worked in Manhattan and wanted to have a place to stay over, but did not want to be New York statutory resident.
I would get a waterfront apartment in Jersey City. You’ve got the ferry that will take you to either the financial section or Midtown. You’ve got the PATH train and if you must drive you are close to the Holland Tunnell. I was inspired, in part, by my covivant and I capping off our four-month RV tour of the South East with a stay in Liberty Harbor RV Park.
Mr. Corrie told me that sort of thing is a nonstarter. There is this certain cachet to having an apartment in Manhattan and despite the relative convenience, Jersey City does not cut it. That confirms a similar sentiment I got from an attorney on twitter. That fellow tends to think that most of the people caught as statutory residents are actually domiciled in New York. And in a way, the notion that being on the opposite side of a not very wide river makes such a big difference is evidence of that.
Get Help
Mr. Corrie indicated that it is not that unusual for people to be blindsided by the statutory resident rule and other subtleties and special issues that are peculiar to New York. If you are dealing with significant dollars you really need someone on your team, who can get into the New York weeds. And practitioners with just a couple of New York clients should be sure to get help from someone with strong expertise. This is actually true of every state with an income tax, but New York has more nasty surprises than most of them. Except for New Hampshire. Don’t get me started.
Then There Is Domicile
New York is one of the states that will fight hard to hang onto somebody who wants to escape its clutches. Mr. Corrie referred me to the Nonresident Audit Guidelines to get a sense of what is going on. The problem with domicile is that it is an almost mystical concept. In a domicile argument with a state, a state that you are claiming to leave has a presumption in its favor. If you are new to the state, the presumption favors you.
A lot of people focus on things like voter registration, car registration, and drivers licenses. That is wise since failure in that area will hurt you, but those are secondary factors to the auditor. The primary factors are home, active business involvement, time, items near and dear, and family connections. “Items near and dear” is my favorite. A good example of that is your pet, I was pleased to see that the manual included books collections. That is definitely one of the things that keeps my distant condo my home rather than the RV that we are roaming the country in.
I believe that the idea of domicile is becoming obsolete. It is based on intent, but of course, has to be evidenced by actions. Here is how the guide puts it
The actual process of ascertaining an individual’s intentions regarding domicile- the crucial question in a residency audit- is a subjective inquiry for the auditor, and often a difficult one. How does one determine what was in a taxpayer’s mind?
It’s probably worse than that. I think quite a few people with multiple residences really don’t have one that is predominant and if the evidence of their actions is examined, it will be possible to craft different narratives.
And if someone can afford to take on the trappings of two different domicile identities – sophisticated New Yorker and Connecticut Yankee or whatever – maybe it is fair that they pay full tax to each state. Manhattan has a lot of infrastructure to support, you want to make out you are a New Yorker, pay up.
On the other hand, I went searching to see if there are other proposals and I found one from someone whose other work is already familiar to me.
The Zelinsky Solution
Followers of this blog will be familiar with Professor Edward Zelinsky from the long-running parsonage drama. His nuanced argument ended up prevailing in the Seventh Circuit. I reviewed his Taxing The Church in 2017. At any rate in a 2014 article in Florida Tax Review – Apportioning State Personal Income Taxes to Eliminate the Double Taxation of Dual Residents – Thoughts Provoked by the Proposed Minnesota Snowbird Tax, proposes a solution to the problem of multi-state residents.
As a matter of both tax policy and constitutional law, it is time to apportion state personal income taxes to eliminate the double taxation of dual residents. All individuals who, for income tax purposes, are residents of two or more states should be taxed along the lines proposed by Minnesota Governor Mark Dayton for “snowbirds”: A state should tax the income with respect to which it has source jurisdiction. As to income which two or more states tax only on the basis of residence, such states should apportion based on the dual resident’s relative presence in each state of residence. This apportioned approach would eliminate the double taxation of dual residents’ income and would comport better with modern patterns of residence and mobility.
Professor Zelinsky suggests that a federal approach would be the ideal way to reach a consistent approach.
The best way to achieve apportioned residence-based income taxation is by federal legislation under Congress’s Commerce Clause power. If Congress won’t adopt such legislation, the U.S. Supreme Court should require such taxation via its Commerce Clause and Due Process doctrines. If neither Congress nor the Court will act to eliminate the double taxation of dual residents’ personal incomes, the states on their own can agree that a state without source jurisdiction over part or all of a dual resident’s income should only tax its pro-rata share of the income which the state taxes on the basis of residence.
We Will See
I don’t know if there is any appetite in Congress for addressing this issue. I’m going to root for the Edelmans getting heard by the Supreme Court
The Latest
New York just filed its brief with the Supreme Court . You can read it here.
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