MoFo New York Tax Insights - Volume 4, Issue 2

Divided Appellate Division Affirms Tribunal's Gaied “Permanent Place of Abode” Decision

By Kara M. Kraman

A divided Appellate Division has affirmed a controversial Tax Appeals Tribunal decision holding that Staten Island residential property owned by a New Jersey resident and occupied by his parents constituted his “permanent place of abode,” and made him a “statutory resident” of New York. Matter of John Gaied v. Tax App. Trib., 2012 NY Slip Op. 9108 (3d Dep't, Dec. 27, 2012).

After initially holding that the multifamily residence owned by Mr Gaied and occupied by his parents (and also partially leased to tenants) was not occupied by Mr. Gaied, and therefore was not his permanent place of abode, the Tribunal granted the Department's motion for reargument. Following reargument, the Tribunal reversed its earlier decision, and held that the Staten Island property was the individual's permanent place of abode.Matter of John Gaied, DTA No. 821727 (N.Y.S. Tax App. Trib., June 16, 2011). The Tribunal concluded that its earlier decision was in error because “where a taxpayer has a property right to the subject premises, 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.” The Tribunal's decision seemed to hold that as long as the taxpayer owns and maintains the property, it is not necessary to examine any other factors.

The Appellate Division upheld the Tribunal decision, but did not adopt the Tribunal's conclusion that ownership and maintenance of a dwelling alone is determinative of a permanent place of abode. Citing to Third Department precedent, the Appellate Division held that in determining whether a taxpayer maintains a permanent place of abode, a variety of factors and circumstances may be relevant, including, but not limited to, whether the taxpayer: (i) had free and continuous access to the dwelling; (ii) received visitors there; (iii) kept clothing and other personal belongings there; and (iv) used the premises for convenient access to and from a place of employment. Although the Appellate Division cited a number of factors that the Tribunal did not give weight to, the court nevertheless held that the Tribunal's findings of fact were supported by substantial evidence in the record. However, even in upholding the Tribunal, the court noted that “a contrary conclusion would have been reasonable based upon the evidence presented.”

Two of the five justices dissented, finding that “the record clearly establishe[d] that petitioner purchased the property . . . as both a place for his parents to live and as an investment” and therefore the Tribunal's determination was “irrational and unreasonable.” The dissent observed that the case law makes clear that the purpose of the statutory residence rule is to tax those who really and for all intents and purposes are residents of the State, citing Matter of Tamagni v. Tax App. Trib., 91 N.Y.2d 530 (1998), cert. denied, 525 U.S. 931 (1998), and found there was clear and convincing evidence that Mr. Gaied did not live in the dwelling nor have any personal residential interest in the property. The dissent also noted that the court did not need to defer to the Tribunal's decision because “the statutory language is neither special nor technical.”

Additional Insights. While the Appellate Division decision upheld the Tribunal's decision, the dissent by two Appellate Division justices is significant. Under C.P.L.R. § 5601(a), the dissent by two justices enables the taxpayer to appeal to the New York Court of Appeals as of right. Assuming the decision is appealed, the Court of Appeals will have the opportunity to address some of the well-known inequities of the permanent place of abode rule and provide more clarity on this issue.

Combined Reporting Permitted by ALJ Despite Absence of Substantial Intercorporate Transactions

By Hollis L. Hyans

In Matter of IT USA, Inc., DTA Nos. 823780 & 823781 (N.Y.S. Div. of Tax App., Dec. 20, 2012), a New York State Administrative Law Judge found that two New York taxpayer corporations should have been permitted to file a combined Article 9-A return, also including their parent holding company, because they established the existence of a unitary relationship without arm's length pricing.

Facts. IT USA, Inc. (“IT USA”) is a United States subsidiary of an Italian clothing company based in Milan, Italy. In 2001, a new corporation, IT Holding USA, Inc. (“IT Holding”), was formed to centralize the operations of IT USA and another affiliate, Manifatture Associate Cashmere USA, Inc. (“MAC”), acquired by the Italian parent in 1999. Employees of IT USA who had also performed administrative services for MAC were transferred to IT Holding. They continued to perform services for both IT USA and MAC from IT Holding's commercial domicile in New York City, including all logistical functions, such as ordering inventory from Italy and having it shipped to U.S. customers, and all such dayto- day functions as performing credit checks, collection activity, advertising and public relations. IT USA and MAC employed only sales personnel, and did not have their own management or administrative employees.

IT Holding used sophisticated software to track shipments and orders from IT USA and MAC, and to monitor outstanding receivables for their customers. IT Holding paid a third party a license fee for the software, and did not receive reimbursement from IT USA or MAC. IT Holding rented a warehouse to store certain IT USA and MAC merchandise, and organized fashion shows to display IT USA and MAC luxury clothing. IT Holding was not reimbursed for the use of the warehouse or the fashion shows. There was no management services agreement, although a management fee schedule was prepared to allocate compensation paid to IT Holding employees among the companies based on estimated hours spent on each. However, no time records were kept, and the...