For many years, taxpayers have periodically attempted to challenge, as unconstitutional, provisions of the New York state personal income tax that cause certain taxpayers to be subject to dual state taxes, in particular, by characterizing as New York residents individuals who are domiciled in another state but (1) maintain a permanent place of abode in New York and (2) spend all or a portion of more than 183 days in New York during the taxable year. Such individuals are taxable as residents in both their state of domicile and New York. In the most significant prior case, Tamagni v. Tax Appeals Tribunal of the State of New York, 91 N.Y.2d 530 (1998), the New York State Court of Appeals held that such provisions did not violate the U.S. Constitution.

Five years ago, the U.S. Supreme Court ruled in Comptroller of the Treasury of Maryland v. Wynne, 575 U.S. 542 (2015), that provisions of the Maryland State Tax were unconstitutional. Since then several New York taxpayers have attempted to resurrect these constitutional challenges to the dual residency problem. The most recent challenge was a recent Division of Tax Appeals determination, Rusakoff, DTA Nos. 827740 and 827741 (Dec. 19, 2019), in which petitioner's choice of vacation home had the unfortunate result of effectively doubling tax on his investment income.

Generally, N.Y. Tax Law §§611 and 612 impose tax on all income of individual New York residents. Section 605(b)(1) provides that, for these purposes, an individual is a resident of New York if either (A) that individual is domiciled in New York, or (B) that individual is a "statutory resident" of New York by reason of a permanent place of abode and presence for more than 183 days.

'Rusakoff'

In Rusakoff, petitioner and his wife were domiciled in Connecticut. However, the couple maintained a second home on Shelter Island, which home was suitable for year-round use. Petitioner worked at a hedge fund, and, presumably in connection with this work, was present in New York for more than 183 days a year, making him a statutory resident of New York.

For the years at issue, petitioner had significant capital gains from the sale of securities (ranging from approximately $3.5 million to $60 million a year). Petitioner paid appropriate Connecticut tax on those gains. However, he initially filed New York nonresident returns for the years at issue, and did not pay New York tax with respect to those gains. In connection with an audit, he amended his returns (now filing resident returns), paid the tax, and then claimed a refund on the theory that he was owed a credit for tax he had already paid to Connecticut on the capital gains at issue.

The administrative law judge (ALJ) found against petitioner, holding that no credit was permitted for the Connecticut tax paid on the capital gains. Relying principally on, and quoting, Tamagni, the ALJ held that intangible income from investments (that is, not from a business), "ha[d] no identifiable situs," and, therefore, was sourced to the residence of the taxpayer. Petitioner's argument that intangible income should be sourced to domicile (of which a taxpayer can have only one) rather than residence (of which a taxpayer may have many) did not prevail.

The ALJ in Rusakoff next addressed petitioner's argument that the Supreme Court's decision in Wynne required a change in the result reached in Tamagni. As relevant in Wynne, Maryland previously imposed a tax composed of a "state tax" and a "county tax" on the worldwide income of Maryland residents. Maryland residents could take a credit against their state tax but not their county tax for tax paid to another state on out-of-state income. With respect to nonresidents, Maryland imposed a tax on in-state income, composed of the state tax and a substitute for the county tax called the "special nonresident tax."

The Supreme Court in Wynne held that Maryland's taxing scheme was unconstitutional under the "internal consistency test." Under the internal consistency test, basically, a tax is unconstitutional if the adoption of that tax by every state would result in the discrimination of interstate commerce in favor of intrastate commerce. Justice Samuel Alito, writing for the majority in Wynne, provided a helpful example:

Assume that every State imposed the following taxes … (1) a 1.25% tax on income that residents earn in State, (2) a 1.25% tax on income that residents earn in other jurisdictions, and (3) a 1.25% tax on income that nonresidents earn in State. Assume further that two taxpayers, April and Bob, both live in State A, but that April earns her income in State A whereas Bob earns his income in State B. In this circumstance, Bob will pay more income tax than April solely because he earns income interstate. Specifically, April will have to pay a 1.25% tax only once, to State A. But Bob will have to pay a 1.25% tax twice: once to State A, where he resides, and once to State B, where he earns the income (emphasis added).

In Justice Alito's example, the Maryland tax scheme failed the internal consistency test as Bob's out-of-state income is discriminated against in favor of April's in-state income.

The ALJ rejected this claim using the rationale of the New York Court of Appeals in Tamagni which concluded that the multiple tax on investment income is constitutional since the tax (really the lack of credit) at issue is a tax on ­in state income. Applying the internal consistency test, there is thus no discrimination against interstate income. Importantly, the Wynne court held that state tax schemes involving double taxation are "typically" constitutional so long as they do not discriminate against interstate commerce. Nonetheless, in addition to Rusakoff, Wynne has inspired a nationwide cottage industry of taxpayers challenging states' double taxation schemes (generally with unfavorable results for these taxpayers).

Analysis

Neither Tamagni nor the later New York challenges like Rusakoff address the fact that the statutory resident definition will, on occasion, result in double state taxation of interstate commerce. For example, if an individual like Rusakoff (i.e., a Connecticut domicile and a New York statutory resident) earned income from a business conducted in Florida (which does not have a personal income tax), the individual would be taxed on such income by both states without a credit. Neither state would provide a state tax credit since the income was earned in a third state. The Tamagni rationale for upholding the New York tax would not apply in this case.

Putting aside the Wynne issue, Rusakoff also illustrates an interesting aspect of the statutory resident rule: Given the distance between Manhattan (where the petitioner presumably worked) and Shelter Island, the petitioner's more than 183 days a year in New York likely had little to do with his permanent place of abode on Shelter Island. In theory, petitioner would have (and may indeed have) been a statutory resident in New York for the years at issue even if he stepped foot only once on Shelter Island. It was sufficient that petitioner had a year-round permanent place of abode in New York to cause his intangible income to be sourced to New York. Although the appeal of Shelter Island is understandable, a beach house on the Jersey shore may have made for better tax planning.

Joseph Lipari is a partner and Aaron S. Gaynor is an associate at the law firm of Roberts & Holland.