Thursday, April 7, 2011

So I am a Resident of New York And New Jersey?

As a follow-up to my recent posting of my article “Domicile is Like an Inertia,” I received an interesting article discussing New York’s Statutory Residence Rule in the Tax Analysts Special Report dated April 4, 2011. The article written by Peter L. Faber criticizes the statutory residence test and argues that it should be repealed. In his article, the author points out that New York State taxes residents on all their world wide income, regardless of whether it has any connection to New York. A person who is not legally domiciled in New York is treated as a resident for income tax purposes if he maintains a permanent place of abode in New York and is present in the state for more than 183 days during the tax year. This individual is known as a “statutory residence.” The statutory residence rule only applies for personal income taxes.

In the article, the author points out that the statutory residence test was conceived as an objective surrogate for the domicile test. It was intended to avoid the complex inquiry that goes into determining a person’s domicile and to ensure that a person who really lived in New York could not avoid resident status by arguing that his “state of mind” placed primary loyalty elsewhere.

The article points out that the New York Department of Taxation has taken an expansive view of the statutory language. The Department views the word “permanent” as relating to the nature of the residence and not the taxpayer’s use of it. The only structural exclusion is “for a mere camp or cottage, which is suitable and used only for vacations.” 20 NYCRR, Section 105.20(e)(1). Therefore, a house or apartment that is not a camp or cottage is treated as a permanent place of abode even if it is in fact used only for vacations or for that matter not at all.

The author goes on to discuss a number of cases involving individuals who clearly were not New York residents but because of the statutory residence test were required to litigate the issue as to whether they were New York residents and therefore to count days. The problem with counting days is that typically taxpayers do not maintain good records of their whereabouts. Certainly the taxpayer has the burden of proof in determining whether he or she does or does not meet the 183-day test. The result is that invariably taxpayers have trouble proving that they were not in New York for more than 183 days during a tax year. Proving a negative is always hard, and proving that a person was not in New York for any part of a given day as the author points out can be extremely difficult.

The advice given is to keep contemporaneous records including a diary every day and any part of every day. The author goes on to recommend that the individual maintain a separate folder for each day and insert in the folder copies of any documentation that they have showing there whereabouts on that day. Still all in all the taxpayer will in all likelihood have a difficult time proving that they are not a New York resident. The author points out that the audit process is time consuming and expensive and can go on for many years. Most taxpayers do not have the time or money to spend on such an audit. The author argues that the statutory residence rule should be repealed and replaced by the domicile test for income tax purposes. Indeed, that would eliminate counting days and refocus the incidence of taxation only on those individuals who are truly domiciled in New York and should bear the burden of the state’s income tax.

IRS in India

According to Today's Wall Street Journal the Justice Department is expected to file a lawsuit Thursday that seeks to force HSBC India to reveal the names of U.S. customers with secret accounts, according to a person familiar with the matter.

The department is expected to file the legal action in a San Francisco federal court.

The move opens up a new front in the U.S. crackdown on tax evasion and comes days before the April deadline for taxpayers to file individual returns.

In February 2011, the Internal Revenue Service announced a second leniency program that offers reduced penalties to tax scofflaws that voluntarily report their offshore accounts. The agency offered the first program in 2009 in the wake of the U.S. case against UBS.

The Justice Department sent signals this year that London-based HSBC Holdings PLC's India operations were in its sights. Prosecutors indicted a New Jersey businessman In January on charges that he conspired to evade taxes by hiding offshore bank accounts in India maintained by HSBC.

The January indictment didn't identify the bank by name, saying only that the institution "was one of the largest international banks in the world and was headquartered in England." A person familiar with the case said the bank was HSBC.

Friday, April 1, 2011

Domicile is Like Inertia

Wikipedia defines Inertia as the resistance of any physical object to a change in its state of motion or rest. It is represented numerically by an object's mass. The principle of inertia is one of the fundamental principles of classical physics which are used to describe the motion of matter and how it is affected by applied forces. Inertia comes from the Latin word, iners, meaning idle, or lazy. Sir Isaac Newton defined inertia in Definition 3 of his PhilosophiƦ Naturalis Principia Mathematica, which states:

The vis insita, or innate force of matter, is a power of resisting by which every body, as much as in it lies, endeavours to preserve its present state, whether it be of rest or of moving uniformly forward in a straight line.

In my review of New Jersey and New York law I have found that like “inertia” domicile has a tendency to remain is a state of motion or rest. Once a person establishes a domicile it is very difficult for it to change.
The New Jersey Experience

N.J.S.A. 54A:1-2(m) defines a resident taxpayer as an individual:
(1) who is domiciled in the State, unless (i) he maintains no permanent place of abode in this State, (ii) maintains a permanent place of abode elsewhere, and (iii) spends in the aggregate no more than 30 days of the taxable year in this State (subdivisions added); or

(2) who is not domiciled in this State but maintains a permanent place of abode in this State and spends in the aggregate more than 183 days of the taxable year in this State, unless such individual is in the Armed Forces of the United States.

Thus a resident is either (i) a domiciliary (unless he or she meets all three conditions in N.J.S.A. 54A:1-2(m)(1) or (2) a nondomiciliary who maintains a permanent place of abode and more than 183 days of the taxable year in this State. An individual who does not fit within the parameters of N.J.S.A. 54A:1-2(m) is a nonresident taxpayer. N.J.S.A. 54A:1-2(n).

It’s important to note that a resident taxpayer is subject to the NJ-GIT on income derived from all sources. N.J.S.A.54A:5-1, “domicile alone…affords an adequate basis for the taxation of income.” Hough v. Director of Div. of Taxation, 2 NJ Tax 67, 72 (Tax Ct. 1980). An individual’s income is taxable without regard to its source. Estate of Guzzardi v. Director of Div. of Taxation, 15 NJ Tax 395, 397 (Tax Ct. 1995).

Consequently, the resident who derives income that is taxed by other jurisdictions is afforded the resident tax credit against the New Jersey tax for eligible taxes paid to other jurisdictions. N.J.S.A.54A:4-1(a).

A person who is not a New Jersey resident is taxed only to the extent of income derived form New Jersey sources. N.J.S.A.54A:2-1.1.

New Jersey Courts have often provided a detailed analysis of the terms “domicile” and “resident.” These terms are nor interchangeable for NJ-GIT purposes because a person can have only one domicile. Geoffredo v. Director of Div. of Taxation, 9 NJ Tax 135, 139 (Tax Ct.1987)

In Goffredo, the tax court discussed the differences between domicile and residence:
“Domicile” and “residence” are related terms and although in certain contexts are used interchangeably, they are not legally identical. Domicile is defined as:
That place where a man has his true, fixed, and permanent home and principal establishment, and to which whenever he is absent he has the intention of returning. The permanent residence of a person or the place to which he intends to return even though he may actually reside elsewhere. A person may have more than one residence but only one domicile.

Additionally, “domicile” is compared and distinguished from “residence” by Black's [Law Dictionary] as follows:

As “domicile” and “residence” are usually in the same place, they are frequently used as if they had the same meaning, but they are not identical terms, for a person may have two places of residence, as in the city and country, but only one domicile. Residence means living in a particular locality, but domicile means living in that locality with intent to make it a fixed and permanent home. Residence simply requires bodily presence as an inhabitant in a given place, while domicile requires bodily presence in that place and also an intention to make it one's domicile. “Residence” is not synonymous with “domicile,” though the two terms are closely related; a person may have only one legal domicile at one time, but he may have more than one residence. Id. at 140.

In Lyon v. Glaser, 60 N.J. 259, 288 A.2d 12 (1972), the New Jersey Supreme Court wrote:
Domicile is very much a mater of the mind-of intention. One may be acquired, or change to a new one, when there is a concurrence of certain elements; i.e., an actual and physical taking up of an abode in a particular State, accompanied by an intention to make his home there permanently or at least indefinitely, and to abandon his old domicile. A person has the right to choose his own domicile, and his motive in doing so is immaterial. The change may be made to avoid taxation, so long as the necessary ingredients for establishment of the new domicile are present. A very short period of residence in a given place may be sufficient to show domicile, but mere residence, regardless of its length, is not sufficient. It has been said that concurrence, even for a moment, of physical presence at a dwelling place with the intention of making it a permanent abode, effects a change of domicile. And once established, the domicile continues until a new one is found to have been acquired through an application of the same tests. Since the concept of domicile involves the concurrence of physical presence in a particular State, and an intention to make that State one’s home, determination of a disputed issue on the subject requires an evaluation of all the facts and circumstances of the case. Id. at 264-65, 288 A.2d 12 (citations and footnote omitted) (emphasis added).

In Gruodis v. Director, New Jersey Division of Taxation; Dkt. No. A-5370-04T3, 08/03/2006 , the taxpayer was born in Lithuania in 1942 and moved to the United States as a child. He maintains dual citizenship, went to school in the United States, including college, married a United States citizen, his first wife Carol, and had two children in the United States. From 1983 to 1998, Victor and Carol maintained a primary residence with their two children in River Vale, New Jersey.
In 1998, Carol died and in 1999 Victor became engaged to a Lithuanian citizen, Ausra. The New Jersey house was in Carol's name and was never transferred to Victor after her death.

Notwithstanding Mr. Gruodis' home outside of Vilnius, Lithuania had not been completed until the end of the year 2000. Mr. Gruodis urges the court to accept that his new domicile was Ausra's apartment, or prior to that, the apartments rented for him by one Omnitel. Yet, for a number of years prior to 2000, Mr. Gruodis continued to live in the same manner, going back and forth from New Jersey to Lithuania.
The court said: “While it is true that a person has a right to choose his domicile, and the motives for his choice are immaterial to a determination of domicile, Wolff v. Taxation Div. Director, 9 N.J. Tax 11 (Tax 1986) , 'declarations of domicile motivated by tax considerations may be carefully scrutinized and readily rejected when negated by the objective circumstances.'” 9 N.J. Tax at 297 quoting Lyon, supra, 60 N.J. at 281.

After reviewing all the evidence the Appellate Court held Mr. Gruodis:
1. retained and maintained the River Vale residence for his son and for his business relations,
2. claimed a deduction for property taxes and mortgage interest on his federal income tax returns,
3. claimed and received a New Jersey Saver rebate,
4. filed a joint tax return, federally and in several states, listing the River Vale address as his residence,
5. listed the River Vale house as his place of business on his 2000 federal income tax returns,
6. maintained his bank accounts and financial accounts in New Jersey,
7. maintained his New Jersey driver's license until he was able to replace it ... with his Bahamas license, and
8. was married in New Jersey and used the River Vale address as his residence on the New Jersey marriage license.

Considering all the evidence as a whole, this court found that taxpayers did not effect a change of domicile in the year 2000.

Illustrative of the efforts needed to change domicile is recited in O’Hara v. Director, New Jersey Division of Taxation; 60 NJ 239 (1972). In O’Hara the New Jersey Supreme Court noted the taxpayer took the following steps:
(1) In early May 1969 she advised her former employer that she had moved to Florida and requested that the retirement checks be sent to 9801 West Suburban Drive, Miami, Florida (the home of Meredith O'Hara). This is corroborated by the employer's affidavit, which states in addition that "she unquestionably intended to remain in Florida the rest of her life," and so he changed all of his records accordingly.
(2) She rented a safe deposit box in a South Miami bank on May 26, 1969, and transferred to it all of her securities and important papers, from her box in a New York bank.
(3) She requested Meredith O'Hara to sell her house in Westfield; and according to the first floor tenant, Mrs. Haney, he endeavored to sell it to them.
(4) She opened a brokerage account with the Miami office of a national brokerage firm on June 12, 1969.
(5) She opened a checking account in a South Miami bank.
(6) In each of the above transactions she gave the same Miami address.
(7) On June 25, 1969 she executed a Declaration of Domicile and Citizenship in Dade County, Florida, and filed it with the Clerk of the Circuit Court of that County. The certificate was signed and sworn to by Miss Johnston and recites that she was formerly a resident of Westfield, New Jersey, that she had changed her domicile to and had become a bona fide resident of the State of Florida residing at Meredith O'Hara's address, since May 3, 1969 (the date should have been May 4), and that she had no intention of returning to her former domicile but intended to remain in Miami, Florida, permanently.

The court also noted that on May 3 (the year of her death) she went to her house with Meredith and packed up her clothes, records, correspondence, family photographs, Christmas card lists and jewelry to take to Florida with her. She removed everything except the furniture, which was of little value (it was appraised at $95 after her death). She said good-bye to her tenants, the Haneys, and as Mrs. Haney said, it was quite apparent that she was leaving for good, and intended to establish her home in Florida.

Based on the clear steps taken by the taxpayer the Supreme court determined that the New Jersey domicile had been abandoned in favor of Florida.

In Samuelsson v. Director Division of Taxation, 22 NJ Tax 243 (Tax 2004), the taxpayer was a professional hockey player for the Philadelphia Flyers. After obtaining a job with the Tampa Bay Lightning, he and his family moved from their New Jersey home to Florida. They moved all furniture and belongings, put their house up for sale, looked for a house in Florida, enrolled their children in a Florida school, but never actually purchased a Florida house or sold their New Jersey house. They eventually returned to their New Jersey house and retained New Jersey as their domicile. However, they contested the Director's assertion that New Jersey remained their domicile for the year they had resided in Florida. The court found that the Samuelssons had abandoned their New Jersey domicile, even though they had not sold their house. An important distinction in Samuelsson was that the taxpayers closed all their New Jersey bank accounts and opened Florida accounts, Mr. Samuelsson changed his driver's licenses to Florida, registered his car in Florida and left the house empty during the period of abandonment.

No person is ever without a domicile in the eyes of the law, and a person is presumed to be domiciled in his domiciliary state until a new domicile is acquired. Lyon v. Glaser, 60 N.J. 259, 277, 288 A.2d 12 (1972).

There can be no establishment of a new domicile unless there is proof of an intent to abandon an original domicile. Bowman v. DuBose, 267 F.Supp. 312, 313-314 (D.S.C. 1967); Citizens State Bank and Trust Co. v. Glaser, 70 N.J. 72, 81, 357 A.2d 753 (1976); Lyon v. Glaser, supra 60 N.J. at 264, 288 A.2d 12. Any disputed issue on the subject requires an evaluation of all the facts and circumstances of the case. Id. at 264-265, 288 A.2d 12.

The abandonment or change of one’s domicile for another must be by clear steps taken by the taxpayer; like inertia it takes considerable force to exact a change.

The New York Experience

It seems that in interpreting the elements of domicile the New York Department of Taxation has also incorporated the laws of physics. No matter how hard one may try it is very difficult to change domicile in New York once established.

As outlined in the New York Department of Taxation and Finance Publication No. 88 dated December 1, 2010 a person can only have one domicile. As it has often been put “domicile is the place you intend to have as your permanent home.” A change in domicile must be clear and convincing. New York uses a number of qualitative and quantitative factors are used to determine if there is a change in domicile including:
● the size, value and nature of use of your first residence to the size, value and nature of use of your newly acquired residence;
● your employment and/or business connections in both locations;
● the amount of time spent in both locations;
● the physical location of items that have significant sentimental value to you in both locations; and
● your close family ties in both locations.

New York says the change of domicile is clear and convincing only when the taxpayer’s primary ties are clearly greater in the new location. This test, that is “clearly Greater” imposes a very high standard and like inertia requires a significant force to move.

Difficulty arises when a taxpayer intends to change his domicile from New York to another state such as Florida. Often such person may keep his New York home or apartment and purchase or rent a residence in another state such as Florida or Texas. Under these circumstances it is difficult for a taxpayer to establish a domicile in another state and become New York non-residents.

When we counsel clients regarding domicile we often advise client to change their financial contacts, their driver’s license, voter registration, address for tax filings, their church or synagogue, etc. As often repeated in case law regarding change in domicile, “formal declarations have been held less persuasive then informal acts of an individual’s habit of life.” Matter of Silverman, Tax Appeal Tribunal, April 6, 1995.

While the standard regarding change of domicile is both objective and subjective, the courts and the Tax Appeals Tribunal have consistently looked to certain objective criteria to determine whether a taxpayer’s general habits of living demonstrate a change of domicile. Among the factors that have been considered are:
(1) the retention of a permanent place of abode in New York;
(2) continued business activity in New York;
(3) family ties in New York;
(4) continuing social and community ties in New York; and
(5) formal declarations of domicile.
Indeed, In the Matter of Slotkis, Tax Appeal Tribunal, March 7, 2002, the taxpayers:
● changed their voting registration,
● changed their drivers’ licenses,
● filed for a Florida exemption from the ad valorem tax and homestead exemption,
● executed new Wills, Revocable Trusts, Durable Powers of Attorney and Health Care Surrogate Designations using their Florida address,
● filed their US income tax return using their Florida address,
● spent 217 days in Florida and 140 days in New York.
The court noted in finding that New York was the taxpayers’ domicile:
There is no indicating in the record that petitioners intended to sever their New York ties or that they possessed the requisite intent to make Florida their fixed and permanent home. Three of their four children as well as grandchildren and great grandchildren resided in the New York metropolitan area. Their grandchildren were described as “their sole source of pleasure.” Petitioners retained their home in Brooklyn, New York. They intended to keep this home to use during their visits to New York, especially during the spring and summer months when they felt it was too hot in Florida. Petitioners spent 148 days in New York during 1997, the vast majority of those between April and September. This was only a minor change in their travel patters from the year 1995, the year prior to Mrs. Slotkis’s stroke, in which they spent approximately six months in New York during the spring, summer and autumn months at a time when they still considered themselves domiciled in New York.
Petitioners did not take any of their furniture from their Brooklyn house to Florida, as they intended to continue to use this home during their stays in New York. This is a strong factor in deciding that they did not intend to give up their New York domicile and make the Florida condominium their permanent home.
The court concluded that the taxpayers’ declaration of a Florida domicile was undermined by their general habit of life in which New York remained their permanent home. The continued maintenance of their Brooklyn home, the large amount of time spent in New York during the year, the lack of any significant change in their travel schedules before and after they claimed to have changed their domicile and the importance of being with their family in New York all serve to negate an intent to give up their New York domicile or to acquire a new domicile in Florida. Accordingly, the court found that the taxpayers continued to be domicile in New York.
Because of the heavy burden the law places on an individual asserting a change of domicile, it appears that unless one actually leaves New York, close down an apartment or sell his house, move furniture, change all contacts, severely limit the time in New York and contact with children and grandchildren it is more likely than not that one will be unable to change their domicile.
One factor which may establish a change in domicile might be a new employment position. Nevertheless a court will look very closely at such an arrangement to determine if it is one of substance. A court would look at whether the job is full time and the amount of remuneration expected and received and whether a new position is real or just “window dressing.” As said in the Matter of Reid, Tax Appeal Tribunal, December 27, 1994:
A change of domicile may be made through caprice, whim or fancy, for business, health or pleasure, to secure a change of climate, or a change of laws, or for any reason whatever, provided there is an absolute and fixed intention to abandon one and acquire another and the acts of the person affected confirm the intention .... No pretense or deception can be practiced, for the intention must be honest, the action genuine and the evidence to establish both, clear and convincing. The animus manendi must be actual with no animo revertendi ....
Indeed a move to another country has been held insufficient to establish a new domicile. In the Matter of the Petition of Taylor, NYS Division of Tax Appeals, ALJ, 822824, 07/08/2010 the taxpayer did not prove, by clear and convincing evidence, that during the years at issue she gave up her long-time New York City domicile and acquired a new domicile as her fixed and permanent home in London. The taxpayer, who owned two homes in New York, accepted a position with her employer that required her to live in London for many years. The taxpayer's initial choice to accept, and subsequently extend for many years, a position in London appeared to have resulted from the opportunity for career advancement offered there rather than from a desire to live in London. However, subsequent to the years at issue the taxpayer purchased a home in London and decided to make it her permanent home. Under NYCRR Title 20 §105.20(d)(3), a New York domiciliary who goes abroad because of a work assignment does not lose his or her New York domicile unless it is clearly shown that the intent is to remain abroad permanently and not to return. The court determined that the facts of the case did not compel a conclusion that the taxpayer was committed to staying in London without any intent to return to New York, where she continued to retain two residences, including her historic place of domicile, or to move elsewhere.