It’s long been acknowledged that the New York Division of Taxation aggressively enforces its residency rules. People who move from New York to states without an income tax are frequently subject to a residency audit to ensure that they have legally changed their domicile. Taxpayers may not appreciate having to defend a residency audit, but it is the division’s responsibility to enforce the rules. However, a recent opinion from the New York Division of Tax Appeals (DTA) reveals the division might need a refresher on those rules.
The taxpayer, Carr, was a lawyer who was licensed to practice law in New York and New Jersey. Presumably, he retired and moved to Florida, although he continued to provide some legal services. Carr filed federal income tax returns using a Florida home address. His business income was reported on a Schedule C.
The Division of Taxation audited Carr’s residency and determined that he had properly changed his domicile. That should have been the end of the story for the residency audit -- but it wasn’t. The division’s report used some interesting logic to come to the conclusion that the taxpayer’s income is subject to New York income tax. The report states:
- The taxpayer received a large amount of money in tax year 2007 from a case he litigated in Florida. Schedule C income for 2008 and 2009 was relatively smaller compared to 2007. The taxpayer stated that all of his schedule C income from legal services was sourced to the state of Florida.
However, the taxpayer is not licensed to practice law in the State of Florida. It was determined that he was admitted as counsel pro hac vice in the Circuit Court of the 12th Judicial Circuit in Sarasota County, Florida. This means that he was given special permission to help litigate this particular case even though you are not licensed to practice law in the state of Florida.
Therefore, all of your income is subject to New York income tax, since your income was attributable to a profession carried out in New York State pursuant to Tax Law article 22, Section 631 as explained by the Court's decisions in the Vigliano and Carpenter cases.
Thankfully, an administrative law judge for the DTA set the division straight. The ALJ concluded that the division’s argument is meritless, inconsistent with the state tax regulations, and inconsistent with New York judiciary laws. “The Division cannot,” the ALJ said, “assert tax merely based on a New York license.”
All in all, the argument was ridiculous. That the taxpayer had to spend the time and effort to appeal it is also ridiculous. It is one thing to aggressively monitor changes in residency from New York to a state like Florida that has no income tax, but to go one step further and make an assertion that is, on its face, contrary to state law is quite another. That said, this case may be an indication that the Division of Taxation is getting more creative when attempting to impose income tax on residents that have moved out of the state.