In the Matter of John Gaied, Appellant,v.New York State Tax Appeals Tribunal, et al., Respondents.

Brief

N.Y.January 16, 2014

- 1 - Timothy P. Noonan Partner Direct Dial: 716.848.1265 Direct Facsimile: 716.819.4647 tnoonan@hodgsonruss.com March 8, 2013 BY OVERNIGHT MAIL Andrew W. Klein, Esq. Clerk of the Court New York Court of Appeals 20 Eagle Street Albany, New York 12207-1095 Dear Mr. Klein: Re: Gaied v. New York State Tax Appeals Tribunal APL-2013-00038 We are in receipt of your letter of February 14, 2013 indicating that this case has been selected for the alternative procedure for selected appeals and directing us to file a letter submission setting forth Mr. Gaied’s argument on the merits. This letter submission, together with two conforming copies and the required enclosures, is filed pursuant to that directive. As explained herein, the conclusion reached by the majority in the memorandum and judgment of the Appellate Division, Third Department, should be reversed. In addition to addressing the merits of this appeal, Mr. Gaied’s objections to section 500.11 review are set forth below. - 2 - LETTER SUBMISSION ON BEHALF OF THE PETITIONER-APPELLANT I. OBJECTIONS TO REVIEW PURSUANT TO SECTION 500.11 OF THE COURT OF APPEALS RULES OF PRACTICE We are mindful that hundreds of appeals are filed in this Court each year and that, in some instances, it befits the parties and the Court to provide this expedited review procedure. However, the inherent complexity and overall importance of the issue before the Court necessitates a full briefing and oral argument to decide this appeal. The procedural history alone evidences the complexity of this case. After a full hearing in the Division of Tax Appeals, an Administrative Law Judge upheld the assessment against Mr. Gaied, the Petitioner-Appellant here. 1 On appeal to the Tax Appeals Tribunal, the Administrative Law Judge’s determination was reversed in a unanimous ruling. 2 Thereafter, however, the Tribunal took the extraordinary step of granting the Respondent’s motion for reargument, and later issued a new decision reversing its prior ruling and upholding the assessment 1 Record (“R.”) 139-235, 40-51. 2 R. 52-65. - 3 - against Mr. Gaied. 3 Even then, however, the Tribunal’s decision was controversial, as the Tribunal’s President issued a dissenting opinion, another rare occurrence in Tribunal jurisprudence. 4 Then, of course, the Appellate Division issued its ruling, but again over the dissent of two Justices. 5 So this is more than a simple matter involving New York’s residency rules. This is a complex case that has generated divergent opinions at every decisional level. In addition, this is a case of great importance. The issue involves the scope and intent of the State’s residency laws under the personal income tax – specifically, the interpretation of the term “permanent place of abode” under New York Tax Law § 605(b)(1)(B). This issue has been the source of much litigation in recent years, 6 and this Court has not yet had an occasion to address the question in any reported case. Moreover, the case (and the “permanent place of abode” issue 3 R. 103-113, 98-102, 14-36. 4 R. 33-36. 5 Matter of Gaied v New York State Tax Appeals Trib., 101 AD3d 1492, 1494-1496 (2012). 6 E.g., Matter of Barker, Tax Appeals Tribunal, January 13, 2011, rearg denied Tax Appeals Tribunal, June 23, 2011; Matter of El-Tersli v Commissioner of Taxation & Fin., 14 AD3d 808 (2005); Matter of Schibuk v New York State Tax Appeals Trib., 289 AD2d 718 (2001), lv denied 98 NY2d 720 (2002) (appeal denied based on failure to establish timeliness), rearg denied 99 NY2d 554 (2002); Matter of Terranova, Tax Appeals Tribunal, September 20, 2012. - 4 - in general) has been the subject of considerable controversy in both the media 7 and the tax-practitioner community. 8 It has also caused the Tax Department itself to revisit and revise its own internal “Audit Guidelines.” 9 Thus, this is not only an important case on an issue that has received a significant amount of exposure in the mainstream media and the tax community. And this is not only a complex case that has generated divergent opinions from many well-respected and smart jurists. Further, this is not only a case whose implications will be far-reaching in the context of tax administration and public policy. In addition to all these factors, this is also a case on an important legal 7 See Craig Karmin, The Wall Street Journal, State Tax Probe Expands (Mar. 8, 2011); Karmin, The Wall Street Journal, Second Homes May Be Costly at Tax Time (Feb. 17, 2011); Peter J. Reilly, Forbes, You Can Be Two Places at Once if One of Them is New York (Feb. 25, 2011); The Rush Limbaugh Show, Transcript of Judge: Out-of-State NY Property Owners Must Pay NY Income Tax (Feb. 11, 2011). 8 See Peter L. Faber, Tax Analysts, New York’s Statutory Residence Wars: A Ray of Hope? (Feb. 18, 2013); Richard A. Dauman, Tax Stringer, Residency Case Continues: An Interview with Gaied Attorney Tim Noonan (Mar. 2013); John H. Gadon, Debra S. Herman, and Felicia S. Hoeniger, Lane Powell, Personal Income Tax Issues Related To Residency And Domicile, Home is where the house is – or is it? (Spring 2012); Peter L. Faber, State Tax Notes, New York’s Statutory Residence Rule Should Be Repealed (Apr. 4, 2011, p. 29, Doc 2011-4763, or 2011 64-1); Timothy P. Noonan & Joshua K. Lawrence, The Gaied Case: A Potential Game Changer in Determining Statutory Residency, The Trusted Professional 1 (June 2011); see also Joseph Lipari and Debra Silverman Herman, Recent New York Residency Cases Reveal Difficulties, New York Law Journal (Mar. 11, 2011). 9 R. 989-999; see also Richard J. Koreto, New York State Society of CPAs E-zine New York News, NYS Addresses Residency Issues in Unprecedented Release (Jun. 28, 2012), available at http://www.nysscpa.org/ezine/. - 5 - issue (how the term “permanent place of abode” should be defined for tax purposes) that this Court has never had occasion to rule on. For all of these reasons, we submit that a plenary presentation of this case is warranted and we respectfully request that this appeal be directed to a full briefing and oral argument. II. BACKGROUND In New York, whether an individual is considered a resident or a nonresident can have significant income tax consequences. Residents of New York are taxable on one thing: everything. Nonresidents, however, are only taxed on income that is connected to a New York source (i.e., New York source income). 10 Simply stated, the State may tax a resident’s worldwide income but may only tax a nonresident’s New York source income. This is true regardless of whether, as here, the taxpayer is also taxable as a resident in another state. An individual will be considered a resident if they are either (1) domiciled in the State, or (2) qualify as a “statutory resident” by operation of New York Tax Law § 605(b)(1)(B). 11 A statutory resident is an individual who is not domiciled in the State, but maintains a permanent place of abode in the State 10 See generally N.Y. Tax Law §§ 601; 631. 11 See N.Y. Tax Law § 605(b). - 6 - and spends more than 183 days in the State. 12 This case addresses the scope of this second residency test. A. Summary Of Relevant Facts Mr. Gaied, who lived in New Jersey and commuted each day to his business in Staten Island, New York, was determined to be a resident of New York for tax purposes because of an apartment in New York he maintained exclusively for the benefit of his elderly parents, who were wholly dependent upon him for financial support. 13 The apartment was located in a multi-unit apartment building that he purchased in 1999 as both an investment property and a place for his parents to live. 14 He never lived in the apartment and only stayed there on occasion, sleeping on the couch, when his parents asked for his assistance with tasks such as transporting them to medical appointments. 15 At no time did Mr. Gaied use his parents’ apartment for any self-serving purposes nor in any manner from which he personally benefited. 16 Nonetheless, the Appellate Division, Third Department, confirmed the decision of the Tax Appeals Tribunal that Mr. Gaied maintained a “permanent place of abode” in the State, and since he 12 N.Y. Tax Law § 605(b)(1)(B). 13 R. 119-120, 158-160, 571. 14 R. 119-121, 154, 157. 15 R. 28, 30. 16 R. 157. - 7 - was in the State more than 183 days each year in connection with his business, that he was therefore a resident for personal income tax purposes. 17 B. The Issue Before The Court The issue before the Court is whether an individual may be deemed to maintain a “permanent place of abode” in which they have never lived and never enjoyed the benefit of personally using or, in the alternative, whether such an interpretation of New York Tax Law § 605(b)(1)(B) amounts to an impermissible expansion of the statute which contravenes the underlying legislative intent. C. Procedural History As outlined above, the procedural history of this case is incredible. It began as a petition for an administrative hearing before an Administrative Law Judge (“ALJ”) in the New York State Division of Tax Appeals in protest of the Division of Taxation’s issuance of a Notice of Deficiency (“the assessment”) asserting personal income tax due by Mr. Gaied. 18 After a hearing, the ALJ issued a determination denying the petition, thereby sustaining the assessment. 19 Mr. Gaied then appealed the ALJ’s determination by filing an exception with the 17 Matter of Gaied v New York State Tax Appeals Trib., 101 AD3d 1493-1494; R. 14-36. 18 R. 239-247. 19 R. 139-235, 40-51. - 8 - Tax Appeals Tribunal (the “Tribunal”). 20 Following an oral argument before the Tribunal’s President and two Commissioners, the Tribunal issued a decision unanimously reversing the ALJ’s determination and granting the petition, thereby canceling the assessment. 21 However, before the dust could settle, the Division of Taxation filed and the Tribunal granted a motion for reargument. 22 Following a second round of oral arguments, in a split-decision to which its President dissented, the Tribunal reversed itself with the issuance of a second decision which affirmed the ALJ’s determination and denied the petition. 23 Mr. Gaied then commenced an Article 78 proceeding in the Appellate Division, Third Department. 24 In a sharply- divided memorandum and judgment with two Justices dissenting on a question of law, the Third Department confirmed the Tribunal’s split-decision that Mr. Gaied maintained a permanent place of abode in the State. 25 20 R. 132-137. 21 R. 117-130, 52-65. 22 R. 103-113, 98-102. We are aware of only two other instances since the Tribunal convened its first quorum more than twenty-five years ago that it has granted a party’s motion to reconsider one of its decisions. See Matter of Stuckless, Tax Appeals Tribunal, (Dec. 15, 2005); Matter of Schulkin, Tax Appeals Tribunal (Nov. 20, 1997). 23 R. 74-97, 14-36. 24 R. 3-13. 25 Matter of Gaied v New York State Tax Appeals Trib., 101 AD3d at 1493-1494. - 9 - III. PETITIONER-APPELLANT’S ARGUMENTS ON THE MERITS Mr. Gaied agrees with the conclusion of the dissenting Justices that the Tribunal’s decision was not only unsupported by the record, but that it was also “irrational and unreasonable” and should be annulled – particularly in light of the legislative intent of New York Tax Law § 605(b)(1)(B). 26 Additionally, Mr. Gaied submits that the Appellate Division’s analysis cannot be reconciled with the conclusion it has reached. Therefore, the basis of Mr. Gaied’s argument on appeal is that: (i) the cases relied upon by the Tax Appeal Tribunal and the Appellate Division are insufficient to determine whether Mr. Gaied maintained a “permanent place of abode” in the State; and (ii) that the Appellate Division impermissibly expanded the meaning of maintaining a “permanent place of abode” for purposes of this statute. A. The Case Law In This Area Does Not Support The Conclusion That An Individual Can Be A Resident Of The State When Their Purported Permanent Place Of Abode Was Maintained Exclusively For The Benefit Of Another Individual As the dissenting Justices in the Appellate Division observed, “[t]he circumstances herein differ from those cases cited by the majority in that petitioner did not change his residence from New York to elsewhere; rather, petitioner has 26 Matter of Gaied v New York State Tax Appeals Trib., 101 AD3d at 1496. - 10 - lived in New Jersey since 1994.” 27 The dissent also observed that while the apartment of Mr. Gaied’s parents was indeed close to his business, “so was his New Jersey home.” 28 Furthermore, when he sold his New Jersey home after the years at issue in this case, Mr. Gaied resided with an uncle – who also lived in New Jersey – during the time that he was building an apartment for himself in the basement of the multi-unit apartment building where his parents’ apartment was located. 29 Significantly, he did not stay with his parents during this period. 30 Instead, just as he always had, Mr. Gaied maintained the apartment in which his parents lived exclusively for their benefit. In the cases cited to and relied upon by the majority for the proposition that Mr. Gaied maintained a permanent place of abode in the State, 31 the underlying facts vary widely. However, and without exception, each of those cases shares a common factual thread: at some point, the taxpayer actually lived in the dwelling at issue, even if only briefly or sporadically. To say it another way, and acknowledging the recognition by the dissenting Justices of this fact, in all the 27 Matter of Gaied v New York State Tax Appeals Trib., 101 AD3d at 1495. 28 Id. 29 R. 985. 30 R. 122-123, 198, 204, 316-317. 31 Matter of Gaied v New York State Tax Appeals Trib., 101 AD3d at 1493-1494, citing Matter of Schibuk v New York State Tax Appeals Trib., 289 AD2d 718 (2001), lv dismissed 98 NY2d 720 (2002); Matter of Evans v Tax Appeals Trib. of State of N.Y., 199 AD2d 840 (1993); Matter of Smith v State Tax Commn., 68 AD2d 993, 994 (1979). - 11 - cases cited by the majority, the taxpayer at issue maintained “living arrangements” at the place of abode. Indeed, in each of the cases cited by the Appellate Division’s majority and by the Tax Appeals Tribunal, the individual inhabited the subject dwelling with conscious volition. Nonetheless, the Tribunal expressly rejected Mr. Gaied’s argument that to be considered a permanent place of abode that he maintained “the premises must be maintained for his own use” 32 and instead opined that “it is neither necessary nor appropriate to look beyond the physical aspects of the dwelling place to inquire into the taxpayer’s subjective use of the premises.” 33 The Appellate Division’s decision upholds this unusual and unprecedented statement of the law by the Tribunal. Consequently, by confirming the Tribunal’s decision, the Appellate Division has established precedent that will inevitably lead to absurd results for individuals who are similarly situated to Mr. Gaied – in particular, that an individual can now be found to maintain a permanent place of abode in the State and be deemed a resident without having “living arrangements” in the State and without ever having maintained an abode in the State for their own use. Otherwise 32 R. 29. 33 Id. (emphasis added), citing People ex rel. Mackall v. Bates et al, 278 AD 724 (1951); Matter of Boyd, Tax Appeals Tribunal, July 7, 1994; Matter of Roth, Tax Appeals Tribunal, March 2, 1989; Matter of Barker, supra. - 12 - stated, the effect is that an individual can now be considered a resident of the State, and taxed accordingly, without ever actually residing in the State. B. The Conclusion Reached By The Majority Contravenes The Legislative Intent Underlying New York Tax Law § 605(b)(1)(B) In Matter of Tamagni v Tax Appeals Trib. of State of N.Y., 34 this Court unambiguously described the legislative intent underlying New York Tax Law § 605(b)(1)(B) as serving the important function of taxing those who, for all intents and purposes, are residents of the State. 35 As noted by the Court of Appeals in that case, the statutory residency rules when first enacted in 1922 were not designed to ensnare a new class of nonresident taxpayers with only non-abiding or transitory connections to New York. Instead, this Court in Tamagni recognized that in enacting the statutory residency provisions, the Legislature intended to tax individuals as residents only when their conduct in and relationship to New York indicated that they were “really and [for] all intents and purposes [are] residents of the state.” 36 And that is precisely why the statute is limited to those who maintained a “permanent place of abode” in New York and were present in the State for more than 183 days in a particular year. 34 91 NY2d 530 (1998). 35 Id. at 535. 36 Id., citing Tax Dept. Memorandum in Support, Bill Jacket, L. 1922, ch. 425. - 13 - Under any reasonable analysis, then, was Mr. Gaied “really a resident” of the State? He commuted to work in New York from his home in New Jersey, as do hundreds of thousands of other nonresident taxpayers. 37 But he had no living quarters here. The apartments he owned were occupied by others. 38 On rare occasions, he would stay overnight at his parents’ place, at their request (as do likely many a son or daughter), but he had no bed or bedroom in the apartment. He kept no clothing or personal effects in his parents’ apartment, and he didn’t use the place for daily attendance at his job. Asking the question posed by the Tax Appeals Tribunal in the Evans case, referenced by the Appellate Division in its decision: were Mr. Gaied’s “living arrangements . . . within the statute’s meaning of ‘permanent’?” 39 Tamagni tells us that the goal of the statutory residency rules was to tax those people whose connections with the State reflect those of other residents – taxpayers who have an abiding and permanent connection to New York. The rules were not designed to ensnare out-of-state commuters with no living quarters in New York in the clutches of New York resident taxation. 37 See U.S. Census, American Community Survey, Trends in Commuting, Out-of State and Long Commutes (Feb. 2013), available at http://www.census.gov/acs/www. 38 R. 982. 39 Matter of Evans, Tax Appeals Tribunal (June 18, 1992) (available at http://www.nysdta.org/Decisions/806515. dec.pdf), confirmed 199 AD2d 840 (1993). - 14 - Along the same lines, this is where some modicum of common sense should prevail. The reason the assessment against Mr. Gaied has been so roundly critiqued in the press and by commentators is generally not because outsiders view the analysis as internally inconsistent with the legislative history. Instead, commentators are simply shocked by the notion that a taxpayer with such a limited connection to New York could nonetheless be taxed as a “resident” of New York State. Indeed, by taking away the “permanence” aspect of the “permanent place of abode” test, one can only imagine how the Tribunal’s decision could affect the nonresident status of other nonresident commuters, such as a parent who purchases (but does not use) an apartment for their college-bound child. The detrimental policy implications of such an interpretation will likely include discouraging individuals from supporting family members to avoid triggering this statute or, alternatively, encouraging individuals to move their dependent family members out of the State to avoid being treated as a resident for personal income tax purposes. Thus, as recognized by the dissenting Justices, the Tribunal’s determination that Mr. Gaied maintained a permanent place of abode was irrational and unreasonable because it is not in line with the underlying purpose of the statutory-residency provisions. 40 40 See Matter of Gaied v New York State Tax Appeals Trib., 101 AD3d at 1496. IV. CONCLUSION As noted at the outset of this letter submission, we believe this case warrants a full plenary review by the Court given its complexity and importance, and therefore we respectfully request that this case be removed from the Section 500.11 review process. In addition, however, if the case remains subject to this expedited-review process, we nonetheless believe that a reversal of the Appellate Division's decision is warranted, in light of the Tribunal's impermissible expansion of New York Tax Law § 605(b)(1)(B). Respectfully submitted, . Noonan, Esq. or the Petitioner-Appellant Enclosures cc: William J. Comiskey, Esq. (wlo attachments) Hon. Eric T. Schneiderman (wlo attachments) Attorney General of the State of NY Attn: Robert M. Goldfarb, Esq. The Capitol Albany, NY 12224 - 15 -