How to Avoid Exposure to Use Tax Audits

by Brian Gordon, CPA What is Use Tax? When sales tax is not charged on a taxable item that you purchase, you may owe "use tax". This can occur if you purchased goods from an out-of-state vendor and the vendor was not required to collect NYS sales tax because they do not have a connection (nexus) with New York. Other times, a local seller may have erroneously thought that the item or service that they sold to you was not subject to sales tax. If sales tax is not charged, and these items are delivered into or used in New York you are required to voluntarily report use tax at the same rate as the sales tax. Use tax is a very important part of New York Sales Tax audits. You may be vulnerable even if you are not a business that sells goods or services subject to sales tax. Sales tax auditors will examine all of your asset purchases and expense items to see if you paid sales tax when you purchased those items.  Very often people and business are not aware of the use tax requirement and do not pay it. They later are surprised to find out on an audit that they owe a significant amount of use tax, plus interest and penalties. This large failure to voluntarily report use tax led to new state laws requiring large internet companies to collect sales tax on behalf of the state their customers live in. You should review your own purchase records to determine your exposure to use tax audits, or engage a sales tax consultant such as State Tax Audit Representation. We may even find that you paid sales tax on nontaxable goods or services and are entitled to a refund. This is known as a “reverse audit”. Correcting errors now, or at least reporting properly on a going forward basis will eliminate interest and penalties if you are audited by the NYS Tax Department.   If your business does not sell goods or services subject to sales tax, you should register and file sales tax returns regardless, to report any use tax that you may owe. Even If you feel you owe zero use tax in a particular period, filing returns limits the statute of limitations to three years from the date of filing. If you don’t file, there is no limitation. The NYS Tax Department would likely look back six years in the case of non-filing. If you would like more information on Sales and Use Tax, or need help with a Sales and Use Tax Audit, please feel free to contact Brian Gordon at 516-510-6041 or email at BGordon@StateTaxAuditRep.com Brian Gordon Bio: Brian Gordon, CPA, is the owner of State Tax Audit Representation, Inc. He represents clients on State and City tax audits and collection matters involving Residency, Sales Tax, Corporation Tax and any other state and local tax type. He also works on IRS audits and collection matters. Previously, Brian was with NYS Department of Taxation and Finance for many years as Manager of the New York Metropolitan District where he worked on many high net worth tax audits of all types. Following his government experience, he was State and Local Tax Director, most recently at Gettry Marcus, CPA, PC. Brian is a member of the NYSSCPA New York, Multistate & Local Taxation Committee, and former President of the NYSSCPA Queens/Brooklyn Chapter. He writes and speaks on various state and local tax issues. He can be reached at 516-510-6041, or by email at bgordon@StateTaxAuditRep.com.

NYS Sales Tax Audits: You thought the audit was finished?

By Brian Gordon

It is important to know that if you are under examination by the state of New York for a sales tax audit, it might not end there. Sales tax audits may be referred to other tax sections within New York state if they feel that the results of the sales tax audit will impact other taxes.


Mohammad and Roosha Javed thought that their audit was completed, but following the sales tax audit of their fast food business, 492 Fast Food, Inc., the New York State Audit Division informed the Javed’s that their personal income tax returns for the same years were selected for audit. The increase in sales per the sales tax audit flowed through as an increase in entire net income for the corporation.  The increased entire net income of the corporation was then determined to be a constructive dividend to Mohammad Javed, a shareholder of the corporation.


These audit findings were upheld in a hearing before Administrative Law Judge Donna M. Gardner who concluded the following:


The sales tax determination provided a factual basis for the Division to conclude that the income reported by petitioner on their personal income tax returns for the years at issue were not accurate, and therefore, the Division properly used the sales tax audit findings to calculate petitioners’ personal income tax liability. Thus, the income tax determination made by the Division was valid and proper.   
 
Please contact Brian Gordon if you are selected for a New York sales tax audit. I will prepare your defense for the sales tax audit as well as a potential corporation or income tax audit.   


                   

New York State Residency: What's New in 2015?

By: Brian Gordon, CPA

“This article originally appeared in the June 2015 TaxStringer and is reprinted with permission from the New York State Society of Certified Public Accountants.”

In 2015, the topic of interest for New York State residency is what effect—if any—the important events of last year had on audit policy. Last year, 2014, was an interesting year in the New York residency arena. The focus was a Court of Appeals decision in the case of Gaied v. New York State Tax Appeals Tribunal.

The Gaied Case

In this case, the Court of Appeals determined that a residence owned and financially maintained by Gaied (i.e., the son and owner of the property) but occupied by his parents as their primary residence was not considered his permanent place of abode. It has been long established in cases such as Matter of Evans that ownership is not the determining factor in cases related to abode. Though Gaied visited his parents and occasionally stayed as an overnight guest, he was not considered a New York resident because he did not have a residential interest in the property. For all intents and purposes, it was his parents’ home. The term “residential interest” was coined by the Court of Appeals in this case.

Last year, there was much talk about the effect the Gaied decision would have on audits: Would there be a significant change in audit policy? What does the term residential interest really mean? If one has an apartment in New York City but uses it only a few days per year, does that constitute a residential interest? Would it be considered a permanent place of abode? If a parent rents an apartment for a child who goes to college in New York City, could that be considered the parent’s residence?

According to the New York State Department of Taxation, the Gaied decision does not alter the department’s procedures with respect to the amount of usage of an abode, as long as it is used as a residence, regardless of how infrequently. In fact, Department of Taxation representatives have stated that they agree with the findings in Gaied, based upon the facts of the case as accepted by the court; the department’s issue was involved more with determining what the facts actually were. So, what effect—if any—has Gaied had on current audits?

Implications for Audits

In order to understand current procedure, it is helpful to look at a case that has similarity with Gaied that the Tax Department won. Many readers of this publication probably remember the case of Barker, which was lost by the taxpayer at the Tax Appeals Tribunal. In Barker, although the Barkers used the abode in question only for limited vacation purposes, the relevant similarity to Gaied is that the abode was used quite often by the wife’s parents—to the extent that, when the Barkers wanted to use the abode, they had to check whether the parents were currently using it. 

The difference in these two cases is a technicality, but it is significant enough for these cases to have different outcomes. In Gaied, the abode in question was the parents’ full-time residence. In Barker, the parents had another abode that was their primary home—that is, their domicile. The significant facts were that the abode was owned by the Barkers and used for vacations. Although the use was limited, they (as owners) had the authority to use it whenever they wanted to, and they “allowed” the parents to use it quite often.

In current audits, auditors are considering the differences in the Gaied and Barker cases. The relevant questions are as follows: Whose residence is it really? If one owns a home that is rented to someone else on a permanent basis, is it considered the owner’s residence? The answer is no.

Gaied showed that there doesn’t have to be a formal agreement—although this author would want one—if one allows a family member or a friend to live in a residence that one owns at no cost. Some consideration would be helpful, such as taking care of the property in terms of physical maintenance and upkeep. The same theory would apply if a parent rents an apartment for a college student, as mentioned earlier. But this could become a cloudy issue if there are extra bedrooms and the parent stays there often; in this case, it is not clear whose apartment it really is.

Additional Considerations

Again, as in Barker, the key is to know who has the authority or control of the residence.  Does one have to be invited, or is it available to that person on an unlimited basis? The term “unfettered access” is one used in the New York State Audit Guidelines. These are issues that the Department of Taxation is considering in 2015. 

Because many owners of second residences do not use them on a full-time basis, there are often informal agreements for usage by another party, whether it is a family member, friend, or transitory renter. These informal agreements will be important factors to consider in determining whether one has a permanent place of abode in New York in the post-Gaied era.

NYS Sales Tax Audits: You thought the audit was finished?

By Brian Gordon    11/26/2014

It is important to know that if you are under examination by the state of New York for a sales tax audit, it might not end there. Sales tax audits may be referred to other tax sections within New York state if they feel that the results of the sales tax audit will impact other taxes.

Mohammad and Roosha Javed thought that their audit was completed, but following the  sales tax audit of their fast food business, 492 Fast Food, Inc., the New York State Audit Division informed the Javed’s that their personal income tax returns for the same years were selected for audit. The increase in sales per the sales tax audit flowed through as an increase in entire net income for the corporation.  The increased entire net income of the corporation was then determined to be a constructive dividend to Mohammad Javed, a shareholder of the corporation.

These audit findings were upheld in a hearing before Administrative Law Judge Donna M. Gardner who concluded the following:

The sales tax determination provided a factual basis for the Division to conclude that the income reported by petitioner on their personal income tax returns for the years at issue were not accurate, and therefore, the Division properly used the sales tax audit findings to calculate petitioners’ personal income tax liability. Thus, the income tax determination made by the Division was valid and proper.   

Please contact Brian Gordon if you are selected for a New York sales tax audit.  I will prepare your defense for the sales tax audit as well as a potential corporation or income tax audit.                      

New York State Corporation Tax Reform 2015

The passing of the budget bill brought sweeping changes to New York State corporation tax laws effective for tax years beginning on or after January 1, 2015. Article 32, which are the laws currently followed by banks for their corporation tax filing requirements is eliminated. Under the new reform, banks will join the majority of corporations and file corporation franchise tax under article 9-A as a general business corporation. The following paragraphs will describe the major changes to article 9-A which will affect the franchise tax on general business corporations.

Economic Nexus and Sourcing

Under current law, a corporation does not have nexus if it only has sales into New York regardless of the amount. Nexus requires physical presence, employees, or assets in New York. If inventory (an asset) is stored at a company in New York performing fulfilment services, there is currently an exemption from nexus.
New York State has created a new economic nexus standard of $1 million of sales sourced to New York for tax years beginning January 1, 2015. If an out of state company with no physical presence in New York, but has sales to New York customers in excess of $1 million they will be subject to New York tax. In addition, the exemption for fulfilment services will no longer apply under the new law, and nexus will be created for having assets in the state.

Sales of tangible personal property

Under Public Law 86-272, if a company’s only connection to a state is that they have employees in that state solely for the purpose of soliciting sales of tangible personal property and those resulting sales are delivered from a point outside the state, tax cannot be imposed on the income resulting from those sales.
Sales of tangible personal property will continue to be allocated to the location of destination. Those sales delivered to New York in excess of $1 million will create nexus under the new law; however Public Law 86-272 is still in effect and should provide a safe harbor, but only for tax on income from sales of tangible personal property. P.L. 86-272 cannot protect against tax on capital or the fixed dollar minimum tax. Although New York has not made this clear as of yet, this presumption follows the policy in other states with economic nexus rules.

Income from services

Public Law 86-272 does not offer protection from tax on income from sales of services or any sales other than sales of tangible personal property. The sourcing rules for sales of services are also changing. Currently, this income is sourced to the location that the service was performed. New York is changing to market based sourcing for services, which means that the income from services will be sourced to the location that receives the benefit of the service; generally the location of the customer. Sales of services to New York customers in excess of $1 million will create nexus and will result in tax on this income.

New Tax Bases

The current Entire Net Income base is revised and becomes the new Tax on Business Income.
The current Alternative Minimum Tax base is repealed.
Tax on Capital
Tax on Business Income
Fixed Dollar Minimum

Tax on Capital

Major Changes to Capital Computations
• Investment Capital will be more narrowly defined.
• Subsidiary Capital will no longer be separately classified – no tax on Subsidiary Capital.
• Business Capital is all capital that is not defined as Investment Capital.
• The tax on capital base will be .15%, and gradually phased out, becoming 0% in 2021.

The New Definition of Investment Capital

Investment capital only includes investments in stocks. Investment capital will no longer include bonds or other securities.
The investments in stocks must be held by the taxpayer for more than six consecutive months, but not be held for sale to customers in the regular course of business. The securities cannot be qualified financial instruments (newly defined) due to an election to apportion the income as business income at eight percent to New York.
If stocks are purchased during the second half of a tax year, they will be treated as being held for more than six months; however, if the taxpayer does not in fact hold that stock for more than six consecutive months, that income will be reversed in the immediately succeeding taxable year.
For purposes of determining whether a taxpayer has held a security for more than six consecutive months, offsetting positions the taxpayer takes in such or similar securities will be considered.
Investment capital does not include:
Stock in a corporation that is conducting a unitary business with the taxpayer, stock in a corporation that is included in a combined report with the taxpayer pursuant to a commonly owned group election, and stock issued by the taxpayer. If the taxpayer owns less than twenty percent of the voting power of the stock of a corporation, that corporation will be presumed not to be unitary.

Tax on Income

Income will be categorized as either, Business Income, Investment Income or Other Exempt Income (a new category). Investment income will be exempt from tax, as well as will other exempt income. There will no longer be income from subsidiary capital.
The term “investment income” means income, including capital gains in excess of capital losses, from investment capital, to the extent included in computing entire net income, less interest expense directly or indirectly attributable to investment capital or investment income, and/or less losses or expenses for hedging positions of investment capital. There will no longer be other expenses attributable to investment income (only interest expense).
Investment income shall not include any amount treated as dividends received from certain foreign corporations choosing foreign tax credit. Investment income cannot be negative, and cannot exceed entire net income.
In lieu of subtracting from investment income the amount of those interest deductions, the taxpayer may elect to reduce its total investment income by forty percent. If the taxpayer makes this election, the taxpayer must also make the same election for “other exempt income”. A taxpayer which does not have “other exempt income” will not be precluded from making this election.
The term “other exempt income” means the sum of exempt CFC (controlled foreign corporation) income, and exempt unitary corporation dividends.
Business income is newly defined as: income other than investment income or other exempt income. In no event shall the sum of investment income and other exempt income exceed entire net income, therefore if ENI is a positive number there cannot be a business loss.
The new Business Income base will replace the Entire Net Income (ENI) base. Lower tax rates will go into effect. The tax on the business income base will be reduced 7.1% to 6.5% for tax years beginning on or after January 1, 2016.
For qualified manufacturers, the rate will be 0% beginning for tax years on or after January 1, 2014.
New Allocation/Apportion Methodology:
New York State is implementing a single receipts apportionment factor using customer based sourcing rules for all taxpayers.
Sales of tangible personal property
As stated above, sales of tangible personal property will continue to be apportioned to the location of destination (shipping point).
Sales of Services
Service income will be apportioned to the location of the customer benefitting from the service.
Digital Products
The method of apportionment for sale of digital products is the location that the customer uses the product.
For purposes of determining the apportionment fraction under this new law, the term “digital product” means any property or service, or combination thereof, of whatever nature, delivered to the purchaser through the use of wire, cable, fiber-optic, laser, microwave, radio wave, satellite or similar successor media, or any combination thereof. Digital products include, but are not limited to, an audio work, audiovisual work, visual work, book or literary work, graphic work, game, information or entertainment service, storage of digital products and computer software by whatever means delivered. The term “delivered to” includes furnished or provided to or accessed by. A digital product does not include legal, medical, accounting, architectural, research, analytical, engineering or consulting services provided by the taxpayer.
Rental Income
Rental Income will be allocated to location of property rented.
Intangibles
Intangibles such as royalty income will be allocated to location of use.
Financial Industry Income
There are many new rules affecting financial industry income apportionment, including a fixed percentage election of eight percent apportioned to New York for some types of income. Otherwise, the focus on the new apportionment rules is the location of the customer as opposed to the location of the taxpayer or taxpayer’s employees.
There are new rules with regard to allocation of bond interest, previously considered investment income, as well as interest on loans.
Reverse repurchase agreements and securities borrowing agreements has been the source of many audit debates. Net interest income from reverse repurchase agreements and securities borrowing agreements shall be apportioned to New York at the rate of eight percent under the new law.
Dividends and net gains from sales of stock or partnership interests
As stated above, stocks must be held for more than six months to qualify as investment capital, therefore, stocks held for six months or less are considered business capital; however dividends and net gains from sales of stock, and net gains from the sale of partnership interests are not included in either the numerator or denominator of the apportionment fraction unless in the discretion of the commissioner, inclusion of such dividends and net gains is necessary to properly reflect the business income or capital of the taxpayer.
Brokerage commissions derived from the execution of securities or commodities trades for the accounts of customers shall be apportioned based on the address of the customer.
Margin interest earned on behalf of brokerage accounts shall be apportioned based on the mailing address of the customer paying the interest.
Railroad and Trucking Business
The receipts from railroad or trucking businesses are based on mileage within and without the state.
Aviation businesses
Air freight forwarding:
Air freight forwarders will use a single sales factor. They currently use a traditional 3 factor formula. A sale is allocated to New York at 50% if pickup or delivery is made in New York and at 100% if both were in New York.
Other Aviation Services
Aviation Service businesses other than from the activity of air freight forwarding acting as principal and like indirect air carrier are still using a unique three factors.
The New York Allocation % is New York receipts (numerator) divided by total receipts (denominator).
The amount of New York receipts is the total receipts multiplied by the average of the following three percentages:
60% of the New York arrivals and departures/total arrivals and departures
60% of New York revenue tons/total revenue tons
60% of New York revenue/total revenue

New Tax Rates (Tax on Income)                                                                  2014              2018
Qualified New York manufacturers                                                                0%               0%
Qualified Emerging Technology companies                                                   5.9               4.875
Small Businesses                                                                                             6.5               6.5
Remaining Taxpayers                                                                                      7.1               6.5

Fixed Dollar Minimum (FDM) Tax

Corporations with over $50 million of New York receipts will see significant increases to their fixed dollar minimum tax. NY receipts in excess of $1 billion will result in $200,000 in FDM.

MTA Surcharge

The MTA Surcharge is becoming permanent, and will be subject to the new economic nexus rules that apply to corporate taxation in New York State. Corporations no longer need physical presence in the MTA districts to be subject to the surcharge.

The surcharge will be at the rate of 25.6% of the general corporation tax under Article 9-A for taxable years beginning on or after January 1, 2015 and before January 1, 2016 before (previously it was after) the deduction of any credits otherwise allowable under this article which is attributable to the taxpayer’s business activity carried on within the metropolitan commuter transportation district. For subsequent years, the rate will be adjusted by the commissioner based on the needs of the state.
The economic nexus test of $1 million in the MCTD applies to combined groups in the aggregate in the same way as the general corporation tax. The surcharge computed on a combined report shall include a surcharge on the fixed dollar minimum tax for each member of the combined group subject to the surcharge.

The tax before credits, and before the surcharge is applied, is subject to a three factor formula to determine the portion of the tax attributable to the MCTD.  The three factor formula is the traditional Property, Payroll and Receipts. The Numerator of these factors is the amounts attributable to the MCTD. The denominator is the amounts attributable to New York State.

In the case that an eight percent apportionment option was chosen as discussed above for the general corporation tax, ninety percent of such eight percent amount shall be considered within the metropolitan commuter transportation district and one hundred percent of such eight percent amount shall be considered to be within the state.

In those situations where income is excluded from apportionment to New York according to the new law, such receipts shall not be included in determining the portion of the taxpayer’s business activity carried on within the metropolitan commuter transportation district.

Combined Reporting

New York State is adopting full unitary water’s-edge combined reporting with an ownership requirement of more than 50%. Since banks will now be taxable under Article 9-A (General Business Corporations), general business corporations and banks can be combined if they meet the new criteria.

Currently the important requirements for combination are “substantial intercompany transactions”, and the correction of distortion.
Under the new legislation, the two important requirements for combination are
• unitary business, and
• more than 50% common ownership
Intercompany transactions and distortion are no longer necessary for combination.

Economic nexus rules as they are applied to combined groups

The threshold for economic nexus as mentioned above will be $1 million in receipts. Each corporation in the combined group does not have to meet the $1 million threshold. The
$1 million threshold is applied to the entire combined group, with one exception. Any combined corporation with less than 10,000 in sales will be excluded from the group for the purposes of determining the $1 million economic nexus threshold.

In addition to these requirements for combined reporting, taxpayers can elect to include in their combined report, additional corporations that meet the 50% common ownership test, even if they do not meet the unitary business test. Once elected, they must stay combines for seven years.

Also includable under the new law are
• alien corporations – if treated as domestic corporations for federal income tax purposes or those with effectively connected income (derived from U.S.)
• captive real estate investment trusts (REITs)
• captive regulated investment companies (RICs)
• combinable captive insurance companies.

Credits will be determined separately, but applied against the combined tax.
New York City does not have these new laws; therefore different combined groups could result.

Net Operating Losses (NOLs)

The rules for NOLs are changed for tax years beginning Jan. 1, 2015.

The new NOLs will be subject to the business allocation percentage (BAP) in the year of loss. A NOL is the amount of “business loss” incurred in a tax year multiplied by the taxpayer’s apportionment percentage for that year. The allocated loss will be carried forward, and applied against allocated income.

Currently the NOL is not allocated. The unallocated loss is carried forward and is applied as an NOL deduction (NOLD) against current year income, before allocation. Any remaining income will then be allocated by the BAP.

Prior years NOLs (prior to 1/1/15) will be converted using a new calculation, and may be used in addition to NOLs under the new law.

Other important points regarding the new law:
The New York NOL Deduction will be calculated independently from the federal deduction. In addition, the respective losses do not have to originate in the same year.
The NOL should not be used to reduce your allocated income all the way down to zero. You only use enough to reduce your income to the point that the resulting tax would be the same as tax on capital or the fixed dollar minimum.

NOLs incurred under the new law (beginning Jan. 1, 2015) may be carried forward for 20 years, and carried back for three years, but not to any year prior to 2015.

If you have any questions regarding the new NYS Corporate reform, or any other state and local audit issues, please contact Brian Gordon, Director of State and Local Taxes at Sanders Thaler Viola & Katz, 516-938-5219.

Domicile Revisited: The Snowbird Case That Didn’t Fly

By Brian Gordon, CPA

“This article originally appeared in the November 2013 TaxStringer and is reprinted with permission from the New York State Society of Certified Public Accountants.”

"Domicile" is the New York state tax issue that never seems to go away. Although this year did not see as much activity as in past years, there was one case with wide implications for the many New Yorkers who wish to spend the winter months in Florida or other warm places. A couple with a long tradition of spending significant time in Florida, who thought they moved from New York City to Boca Raton, learned a painful lesson about the Empire State's strict residency rules, and the need to have careful documentation when arguing a case before the Division of Tax Appeals.

The case in question was in The Matter of Donald and Rose Lieberman, DTA No. 824101, decided by Administrative Law Judge Joseph W. Pinto Jr. and involving the years 2004 and 2005. The issues in the case involved domicile and statutory residence, as well as assessed penalties.

The Lieberman case goes to the heart of New York's domicile laws and rules, and some background on these can highlight the significance of this particular ruling. Domicile is a complex issue that involves intention and sentiment. In general, it is the place that individuals intend to be their permanent home. There is a range of sentiment, feeling and permanent association established with the home. A domicile once established continues until the individual in question moves to a new location with the bona fide intention of making a fixed and permanent home there. The burden to prove a change in domicile is on the person claiming the change. In this case, the Liebermans claimed that they changed their domicile from New York City to Florida in February 2004; therefore they have the burden to prove by clear and convincing evidence that a change was made.
"Statutory residence" is more easily defined. If you have unfettered use of a permanent place of abode in New York (a residence), and you are present in New York for more than 183 days (any part of a day equals a day) then you are a resident for tax purposes.
New York state audit guidelines direct the auditors to examine five primary factors to determine which home or location is the primary home – the domicile. These factors try to mirror the issues generally considered by judges in their evaluation of cases. There are also other factors; however, most cases are decided based on the primary factors.

The primary factors are:

• Home: Comparison of the homes
• Time: Comparison of time spent at each residence
• Business: Comparison of business activity in each location
• Near and Dear: At which location are valuable possessions or personal keepsakes?
• Family: At which location are close family ties?

Permeating all of the factors, although not listed as a separate factor, is the issue of lifestyle. A term often used by judges is “habit of life.” This issue proved crucial in this case as well as another case from last year, Matter of Cook, previously described in an earlier Tax Stringer article.
How did the Liebermans fare when their situation was matched against the primary factors?

Home Factor
In the first year of audit – 2004 – Mr. Lieberman was 78 and Mrs. Lieberman was 80. They owned their home in Queens, N.Y. since 1971. Petitioners began traveling to Florida in the early 1980s to escape the cold. They purchased a house in Boca Raton, Fla., in January 1990. The Liebermans became members of a social club as a requirement of ownership of their home. In the early 2000s the Liebermans sold this home and purchased another home in Boca Raton. There was no club membership requirement with this home.
In analyzing the home factor, what is missing in this case is the petitioners' detailed description of the homes. We have no choice but to conclude that one home was not more significant than another. To make a convincing claim of domicile change—that is, to show there was a real move from New York to Florida—the petitioners should explain their emotional attachment to this new home and community. There was no mention of social activity other than a club which they were required to join as part of ownership of a home they bought years ago, before moving to a different home. There was no mention of social activity or hobbies with the new home. What took place during 2004 for them to claim a change in domicile? There was no change mentioned in the case.

Time Factor
The Liebermans claimed that they spent approximately 5 months each year in New York; however, this was not proven. For the sake of this discussion we'll assume that the time spent was approximately equal in New York and Florida. This is not convincing for a change of domicile.

Near and Dear Items
Nothing mentioned.

Family Ties
During the audit period, Mr. Lieberman had three children, a son and two daughters. The son lived in Florida during the years in issue and the daughters in Connecticut. Mrs. Lieberman had one child who lived in Arizona. Did the Liebermans move to Florida to be near their son? They didn’t mention that.

Business Ties
Mr. Lieberman invested in and managed residential real estate in New York for many years. In 2004, 2005 and 2006 he downsized his real estate business, but he continued to operate and manage the business with the help of an employee in New York who was in constant contact with him by telephone while he was in Florida. Mr. Lieberman also spoke with his tenants by telephone. When he returned to New York, he would check on his investment properties maintaining personal contact with his tenants. Mr. Lieberman expressed his desire to remember “who I am and what I am.” He believed he accomplished this by continuing to negotiate leases, handling renewals and creating new tenancies, all of which were “done through” him, providing him personal contact with his clients, enjoyment and something to do.

Only on this issue of "business ties" do we find out who Mr. Lieberman is, per his own quote “who I am and what I am.” This is what domicile is all about. It is the first time we see any feelings of sentiment, and permanent association; it is with his New York real estate business. This is his habit of life. There was no business activity in Florida. If you were to describe Mr. Lieberman, you might describe him as a New York real estate manager who winters in Florida – a snowbird. That does not add up to a clear and convincing change of domicile from New York to Florida.

According to Judge Pinto: “What is glaringly missing, other than the purchase of houses in Boca Raton, was any evidence of an intent to change their domicile to Florida. There was no mention of a daily routine in Florida, much less a social life. There was not a range of sentiment, feeling and permanent association established with Florida.”  Since the petitioners did not have adequate documentation for their time spent in Florida or New York, they were also found to qualify as New York statutory residents. Petitioners were also found to be subject to negligence penalties.

Each domicile case has its own nuances. There are no two cases with identical facts. It is necessary to understand the nuances and the relevance of each bit of information, and to be thoroughly prepared before addressing a New York residency audit.

---

Brian Gordon, CPA, is a state and local tax consultant in private practice. Previously he was with the NYSDTF for more than 30 years, most recently as a District Audit Manager in Manhattan and Brooklyn where he was involved in many residency audits. He is a member of the NYSSCPA New York, Multistate & Local Taxation Committee and writes and speaks on various tax issues. He can be reached at 516-510-6041 or bgord520@gmail.com. He posts a monthly blog at http://gordonstate.blogspot.com.

NYS Partnership Alocation Methods

There is some misunderstanding among tax professionals regarding the proper way to allocate income to New York State from partnerships and other unincorporated businesses. It is clear that

New York State residents must report 100% of their share of income from partnerships on their

New York Resident Income Tax Return. There is no allocation allowed for residents. The allocation

methods apply to nonresidents only.

To consider allocation, we have to determine if the business has nexus in New York. Business is

carried on in New York if activities are conducted with a fair measure of permanency and continuity.
Since there is no specific number of transactions that create nexus, tax professionals should be
conservative in their approach to this issue. For the purpose of comparison, New York State Sales Tax Bulletin ST-175 says that you have nexus for sales tax purposes if you make sales of taxable products to customers within New York State, and regularly (at least 12 times a year) deliver the products in your own vehicles.

Any amount of personal service income would create New York source income, and therefore nexus.

The website, Law.com defines personal services in part as:

 

In contract law, the talents of a person which are unusual, special or unique and cannot be performed

exactly the same by another. The value of personal services is greater than general labor, so woodcarving is personal service and carpentry is not.  Entertainers would fall into this category. General service income (i.e. carpentry) may not create nexus if it is an isolated transaction.

After one has determined that a business has nexus in New York, and business is carried on partly

within and partly without New York State, one must consider allocation methods.

The rules for partnership allocation are not the same as the rules for corporations.

Most general corporations are now required to use only the Gross Income (Receipts) Factor as