state and local outline

8/2/2019 State and Local Outline

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A) IntroductionHierarchy of NYS Tax decisions

1) Court of Appeals

2) Appellate Court 3d Dept

Under current law, the Tax Dept cannot appeal a TAT decision only TP can

o Theory:TAT is the highest level of the agencyagency should not be able to appeal itself.

Highly deferential to NYST&F and the lower TAT/ALJ

3) TAT (Tax Appeals Tribunal)

Only has 3 commissioners/judges

Also a separate division

Last level of administrative review in NYS

o Appellate level courto Has de novo review (unlike most appellate courts)but wont overturn credibility of witness,

will just change findings of fact

Vast majority of cases get affirmed

These decisions are binding.

4) ALJ

Really the division of Tax Appeals (DTA)

Issues written decisions

Independent, quasi-judicial tax court

o Accounts & lawyers who have been appointed as judges.

Decisions are only binding against other ALJs

o But TAT will look to ALJ decisions for current thinking on an issue

5) BCMS (Bureau of Conciliation & Mediation Services)

Division of Tax Dept

Can go to this division to get your audit cancelled.

Does not issue written appeals.

Some where along the process, there can be a TSB-A Issues advisory opinions

Similar to private letter rulings of IRS

Not binding on ALJs or court just Tax Depts current thinking on an issue.

In some cases you can go directly to state court for certain issues.

Two Main Issues in Personal Income Tax


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1) Residency

o NYS has the most aggressive residency policy (Calif. is second)

o People want to claim residency in FL b/c it has not income tax

o Commuters who have an apt in NYC used occasionally for work.

NYC Commuter Tax is unconstitutional!!! NYC cannot tax people who are

not residents.

NYS can tax non-residents through source income

2) Income Allocation

o NY wants to tax things that originate in the state (i.e. rental income on apt in NYC,

non-compete clauses).

B) DomicileThere are 2 ways to make someone a resident of state:

1) Domicilewhere you intend to be your home (where your heart is)

2) Statutory Residency spend more than 183 days in the state

Domicile Concepts

1) Intention + Residence = Domicile

Must intend for it to be your permanent home and actually be present in the state (i.e. have a house

there)

2) Leave + Land Concept

You must actually leave your old domicile and arrive in the new one

Old domicile remains until youve taken up permanent residence in a new place.

3) Only ONE domicile

Your domicile of origin is where you were born/raised.

4) Burden of Proof on person asserting change

Standard: clear & convincing

Presumption against change of domicile in another country easier to change domicile within country

(from state to state)5) Question of Fact

Domicile can only be determined by very specific fact patter for each TP.

6) Spouses can have separate domiciles

Used to be that wifes domicile is where the husbands is common law rule

It is nowpossible for spouses to have separate domiciles NY Rule

o Can rebut the presumption that spouses have same domiciles.


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o Have to show either:

Separation by law i.e. legally divorced

Separation in fact harder to show

7) Dont have to severe all ties with old domicile to change to new domicile

But the value and amount of these ties are determinative.

Policy: Dont want to push people out of NYS still want them to donate to NY institutions and own

property (pay property taxes).

o There is a statutory exception that auditors cannot consider charitable donations as indicative

of domicile.

8) Motives are immaterial

But you still need to establish the requisite intent

9) Domicile of Origin

Everyone starts with this place of birth, where family is, etc.

If you dont establish a new domicile, this is presumed to be your domicile.

Matter of Newcomb (1908):

If you die while domiciled in NYS NY can tax all. But if your domicile is somewhere else,

then NY can only tax the estate assets present in NY.

Her original domicile was in NJ and also NYC.

Wants to leave her money to Tulane Univ. (memorial for her daughter) and she is advised her to

change her domicile and she could make an express declaration that effect.

o She had declared NJ to be her domicile in several documents so she executed a New

Orleans declaration that she intended NO to be her permanent home and domicile.

She sent these announcements to several people, including the person to become her

executor.

Your stated intentions are relevant, but they are self -serving and are not enough need affirmative

acts.

Must be a union of residence + intention

There must be a present, definite and honest purpose to give up the old and take up the

new(page 9)

o Motives are immaterial except as they indicate intention.o Domicile may be made through: caprice, whim or fancy, for business, health or

pleasure, to secure a change of climate, or a change of laws, or for any reason

whatever,providedthere is an absolute and fixed intention to abandon one and

acquire another and the acts of the person affected confirm the intention.

NO pretense or deception b/c intention must be honest!

There may be absences from the new domicile.


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Court affirmed surrogates ruling that Mrs. Newcomb was competent and free from restraint to changer

her domicile.

o Did not allow testimony that she was healthy and thus, could have gone to NO more than she

did.

NYS TEST FOR DOMICILE Affirmative Acts:1)Home

o What is the nature of the home? Permanent vs. dormitory/hotel style?

o Compare size, value, nature of use, historical

2) Near & Dear or Teddy Bear Test

o Bring personal items, those most important to your domicile.

3) Time Factor

o One of the most important courts look at how much time was spent in NY vs. New Orleans.

o Concept: People spend more time in their home/domicile than anywhere else. But this gets tricky with people of means b/c they have homes all over the place.

4)Business Factor

o Where is your active business involvement?

o Passivebusiness does not matter (i.e. being a partner in LLC or owning stock)

TIE BREAKER Family Ties (could be the 5th).o Where are you kids?

o Mostly refers to spouse and minor children.

TIE BREAKER Formalitieso Drivers license, register to vote, declarations of domicile (FL), mail, will

Matter of Reichstetter (2002):

Tax Dept conceded that he had changed his domicile to FL, but in May 1996 (when he closed

transaction on purchase of new residence and not when his employment ended with Merrill Lynch).

o He had previously told many people he had the intention of retiring to FL by age 50

happened sooner b/c of snowboarding accident.

o Performed all major transfers by Feb 1996.

Negotiated termination K with Merrill Lynch

Took his belongings (near & dear) to FL and had his crs shipped.

Told his FL gf he was there to stay

Thenhe took more formal steps to make FL his domicile.

[these all made clear his intention to abandon NY + move to FL in Feb. 1996]


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So long as you have the intention to make somewhere your home, as soon as you

take up residence there anywhere(even if just staying with a friend while looking for a

home) then you have changed your domicile.

Matter of Aetna National Bank v. Kramer (within Knight)

TP died while in the processing of moving

Court said that she had packed up her house and was intending to move to NJ so she had showed the

requisite intent + residence (b/c had been staying with her sister in NJ)

Matter of Bostwick (2007):

TPs sister tricked her into moving into an apt in NYC but always considered NJ her home she was a

trust fund baby.

o Grew up in NJ, and always came home from college

o However, she only had spent 3 days in NJ that year b/c she travels A LOT Burden is on the TP in this case (in previous cases it was on Tax Dept and they lost b/c burden of

challenging domicile = hard)

Her only home, job and personal stuff was in NYC.

o Then how did she win?!?!?

o Wealth permits individuals to live in a manner that is unlike the average person

Normal person would only have one home, but she travels a lot and has enough

money to have many homes. She didnt do anything in her rich world that showed she

intended to make NYC her new domicile. It was only a transient place until she figured

out what to do with her life.

o Judge also believed her b/c she was not paying fewer taxes in NJ (so domicile was not

motivated by tax evasion).

Motives are not relevant.

Matter of Knight (2006):

TP gets caught shacking up with his gf in NYC (where he works), but he is claiming to live with his

parents in Connecticut he was claiming that he was a commuter.

Lost at ALJ level but WON at Tribunalo ALJ said he didnt believe for one minute that TP was living at home with his parents and n ot

with his gf.

There were 2 apts in NYC that he stayed in the city he didnt have free and unrestrained

access to the alleged abodes.

o Corp. apt had to sign it in and out


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o Girlfriends apt there were 2 locks and he only had a key for one (gf let him have access on

the days she wanted him there)

Goes towards statutory residency

He was in the process of a divorce and happened to stay with his gf (transient)

o They eventually got married and they lived in Connecticut

o As a matter of law, never left and gave up his Conn. domicile.

His kids were there.

Auditors tried to take it out of context of the divorce.

The presence of an suburban commuter at work or play in New York on most days, without

more, does not create a New York domicile. (p.30)

Quotes Aetna (see above)

Matter of Irom (2005):

TP retired from NYC law firm and said that he changed his domicile to Westhampton.o He continued to maintain NYC apt and Westhampton home (90 miles apart)

Court says although its a subjective standard, the following objective factors can be applied:

o (1) Retention of permanent place of abode in NYC

o (2) Location of business activity

o (3) Location of family ties

o (4) Location of social & community ties

o (5) Formal declarations of domicile.

The court finds that TP did not change domicile b/c

o TP maintained and made frequent use of NYC apt

o TP spent more time in NYC than Westhampton

o His general habit of life was notcentered around Westhampton

TP used NYC address for virtually all bills (including utility bill for WH house)

Used NYC dry cleaner and doctor

o Even though he had retired from firm the # of days spent in NYC did not change.

Matter of Gemmel (2004):

She was claiming to be in California

but had moved from California to NYC for a job with her lifepartner.

Bought her home in NYC (brownstone) and rented her apt in California

o NYC investment property, historical, partner & dog lives there.

This case came down how the issue was phrased

What does it mean to have a domicile???


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o Court says domicile is not the place you intend to be forever, but the place

you are presently in with no intention of leaving at any definite time in the

future.o Thus, NYC is still domicile b/c there is a present intent to remain for an indefinite time (even

though there is also a floating intention to return to old domicile.

STATUTORY RESIDENCY(rigid test)

1) PPA Permanent Place of Abode

2) > 183 days reside in the jurisdiction for more than 180 days.

NY Tax Law 605(b)(1)(A). EXCEPTIONS TO NY RESIDENCY RULE

1) 30 Day Rule

(a)Must have a PPA outside of NY(b) There can be NO PPA in NY

(c)Must be in NY for less than 30 days

2) 548 Day Rule

(a)450 days must be spent in a foreign country (out of 548 days)

(b)No spouse (unless legally separated) or minor children can be anywhere in NY for

more than 90 days.

THIS LAW HAS CHANGED Used to be the rule that they just couldnt be in a PPA

that you maintained but wives could just move out of the home and into a new one

to avoid this.

C) CreditsMatter of Gianturco (2005):

Involves Resident Tax Creditget a credit for the amount of tax already paid to the

other state attempt to avoid double taxationo Must have income earned/sourced in the other state.

o Imposed under Tax Law 620(a) applies to tax imposed by another state, D.C.

or Canadian province.

o Get credit for:

Income taxes imposed by another state upon compensation for personal

services performed in such other state


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Income from a business, trade or profession carried on in other state

Income from real or tangible personal property situated in other state.

o Would also get credit if intangible income earned in Conn. while TPs were

residents of NY.

TP had income from capital gains receiving royalty income from royalty agreement from Nevada

LLCs (so this was intangible income)

o Common Law intangible income is deemed to be located in domicile He doesnt get a credit for the intangible income b/c it wasnt deemed to have earned in either

Connecticut or NY!

o It was sourced to Nevada.

o Also, TP wasnt taxed on by Conn. b/c of income earned there taxed by Conn. b/c of status

as Conn. domiciliary.

D) Statutory Residency

TEST for statutory residency

(1) Must maintain andhave a permanent place of abode for substantially

all of the taxable year in NY, AND

(2) Spend more than 183 days in NYS/NYC per year.

STATUTORY RESIDENCY CONCEPTS:

1) PPA + 183 days

2) Camp or cottage exception(physical aspects)

3) Ones relationship to the abode must include conducive living

arrangements

4) Investment property is not a PPA.

5) Voluntary non-use may notbe enough

6) 11 month rule must acquire or dispose of a piece of property during thetaxable years in order to be applicable.

7) If you lackfree & continuous access then not your PPA.

o Cannot argue you dont have free & continuous access if it is self-

imposed or not explicit in a lease.

8) If something is uninhabitable, it is not a PPA during the period of

uninhabitability.


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o If its not for substantially part of the year, then doesnt meet 11 month

rule so not PPA.

9) Maintenance of an abode for 3rdpartys exclusive use is not yourPPA.

o i.e. case where grandparents kept home, but daughter & grandson live

there.

10) Maintenance payment/contribution of expenses is only ONE factor.o Must be whatever is necessary to maintain a conducive living

arrangement

1. Overview & Constitutionality

Matter of Tamagni (1999):

Earning on stocks & bonds intangibles Commuted from NJ to NYC for working

o Simply commuting from NJ to NYC for the purpose of work does not affect interstate

commerce, so Commerce Clause does not apply.

o These are merelyincidental effectsthat are not sufficient

o (commerce clause analysis see p. 103)

Statutory residency creates the potential for double taxation, especially if its capital income.

o Ability of a State to tax its own residents is a traditional aspect of state

sovereignty

Could not get a credit from NJ b/c it was his domicile and not from NY b/c he was a resident.

p. 101 - Credit is generally unavailable for intangible income b/c it has no identifiable situs

o Mere investment income recognized under mobilia sequuntur personam(movables

follow the person) is subject to tax of state ofresidence/domicile.

o Except where TP can show intangible income is derived from TPs activities in

another state, then entitled to credit.

2. Permanent Place of Abode

20 NYCRR 105.20Residency Regulations


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Note that language about the 548 Day exception is outdated here has not been changed since the

statutory amendment.

Matter of Slavin (2007):

TP lived in NJ and travelled to NYC for work. They also owned a cabin in the Catskills (but it was not

suitable for work b/c needed phone & internet) it was a vacation home.

Arguments:

o NYS said that, even though they only used it for vacation purposes, it was suitable for other

purposes.

o TPwasnt suitable for all year b/c no furnace.

TP used the Camper/Cottage Exception (20 NYCRR 105.20[e][1])

o Looks to habitability and whether suitable for other uses

o Used to say Place should be considered a permanent place of abode so long as it can be

used all year round

focus on physical characteristics. But dont do this as much.

HOLDING: It was not suitable for use all year round property is accessible only by an

easement and is not maintained so not readily accessible in winter

o Thus, not accessible all year round so falls into Camper/Cottage exception

was only used for vacations.

Matter of Labow (1997):

After moving to Westchester County, the Labows still had their NYC apt.

If there is no bed and no personal belongings then how can this be your permanent place of abode?

o Even though it seems they removed all their furniture, Tax Tribunal still rules that it was

their permanent place of abode

o Withoutevidence that petitioners did not or could not have resided in the apartment

during the years at issue

did not submit ANY evidence to support their case

also hard to prove that a place onceused as PPA is no longer PPA.

Tax Dept likes to cite this case to say voluntary non-useof what is otherwise a PPA means it still is

a PPA.

Matter of Fiore (1992):

Domiciled in Florida but owned 2 properties in NY

Even though TP admitted he had spent more than 183 days in NY it was for the purpose of checking

on his mother and his investment properties.


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Investment property is not a PPA, nor is an abode that your legitimately rent out

(i.e. Landlord cannot have free access to the abode by lease).

Matter of Stein (1995):

TPs resided in NJ but wife decided she needed her own income and wanted to start an interior design

business needed presence in NYC so husband bought her apt

o Eventually got divorce.

o Apt was left vacant TP gave it over real estate agent to try to sell.

He was over 183 days b/c he commutes and NYS trying to say hes a statutory resident by saying his

wifes apt was his PPA

HOLDING: for TP.

o Even though suitable for year-round living, it was not his PPA

o Even though he owned it, he neverstayed there.

Must look at the personal relationship to the abode that is necessary to create a PPA.o The only reason he got the apt was for his wifes mid -life crisis and he never stayed there, he

hated NY.

Therefore, PPA look at

Whether suitable for living all year-round

Personal relationship to abode (personal belongings, actually stayed there)

Matter of Brodman (2002):

TPs had Park Avenue apt and then divorced (agreement to sell apt)

Allowed their cousins to stay there while their new house was being built.

TPs try to use 11 month rule but does not come from the statute, but the field auditors

guidelines!!!

o Says you will not be deemed to have maintained a PPA for substantially all of the

year unless it was for 11 months.

o Mustacquire or disposeof property during that year!

ALJ does not agree with TP

o 11 month rule is just a guideline (ALJ and courts not bound by it) Furthermore, even if guidelines doapply, TPs didnt acquire or dispose of a property in

that year

Also, they used it for 10.5 months hard for a judge not to say substantially all of

the year (different if it was only 6 months)

o Not clear there wasnt free & continuous access b/c no formal agreement since

doing family a favor.


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Matter of Panico (1990):

Deals with the 30 day exception

o 1) Have PPA in Arizona

o 2) Spent less than 30 days in NY

o 3) BUT have PPA in NY daughter and grandchild living there and TPs still paying living

expense since daughter on welfare.

Held for TPs

o If you maintain a PPA of abode for someone elses permanent use

then its not your PPA!o Didnt rent it out to anyone, but was occupied by their daughter & grandchild by necessity

If they had merely rented out NY home then there would be no question it

wasnt their PPA.

Matter of Evans (1992):

TP sold his apt in NYC and then began living in the rectory with a priest.

Reasons he claimed it wasnt his PPA:

o 1) Not maintaining household b/c shared living expenses

o 2) No ownership or formal agreement at all!

Seminal case for maintainingvery fact intensive inquiry.o Means doing whatever is necessary to continue ones living arrangements in

a particular dwelling place.

Permanence must encompass the physical aspects of the place as well as the

individuals relationship to the placeo TP had been living there for 12 yearso He was free to come and go as he pleased and have guestso Could use any area of the rectoryo Had put his own furnishings and personal effects in there.

Reversed ALJ and held for Tax Division.

Matter of Moed (1995):

Husband and wife had separate living arrangements.

o She didnt want to move out of NYC when he moved to Conn. upon retirement

o He moved all his belongings out of NYC apt.

Mr. Moed designed and built Conn. home and bought new furnishings for it.


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o He changed voter registration, passport and drivers license.

He generally drove to work from Conn. but sometimes spent the night in his wifes NYC apt or sons.

ALJ It is not the amount of time that is determinative---but the regularityand certaintyof

the overnight arrangement that is essential.

o Separate domiciles reflect their respect for each others privacy but they were still

married and he still slept at his marital home.

Tax Trib. Overrules ALJ b/c they find that Mr. Moed was not maintaining the apt. in

the same was as TP in Evans.

o He did NOT have free & continuous access to the apt.

The fact that restrictions on TPs access to apt were imposed by

mutual agreement between TP and his wife does not alter the fact

that his access was limited.

If you do not have free & continuous access then it is not your PPA

o Restriction can be explicit (lease) or implicit(dont want to impose on familymember)

3. 183 Day Rule

What constitutes a NY day? Any minutes counts as a day! Exception: Travel rules

o If you come into NY solely to board a train, plane or bus or if you are passing through on your

way to another destination outside of NY.

o But if you get off your plane and then stay in NY for a night that counts have to get right

out.

Exception: Involuntary presence for hospital days

o Cant be in NY b/c of your family member or spouse has to actually be you in the hospital

o TP has to be the one admittedto hospitalcant merely be visiting someone there

Matter of Brush (2001):

Mrs. Brush was in hospital when Mr. B visited her, those counted as NY days for him.E) Temporary StaysRegulations used to have a Temporary Stay exceptionIf a place was maintained only during a (1) temporarystay and to achieve a (2) particular purpose.


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Tax Dept used to say if you were here for less than 3 years (absent evidence to the contrary) =

temporary.

Had to be ascertainable when your purpose would be achieved.

20 NYCRR 105.20(e)(1).

THIS EXCEPTION NO LONGER EXISTS!!!

HYPO: You have a million $ apt and are here on 2 year K for a particular purpose.

Can still argue that you are here temporarily b/c the Regulations are just Administrative interpretations.

Regulations cant contradict the law only a statutory resident if you maintain a permanent place of

abode argue it was temporary.

o However, the courts will give a lot of deference to the Tax Dept regs.

MATTER OF LEGORRETA (2006):

Mexican domiciliaries claimed they were only in NYC for a particular purpose (i.e. MA at Columbiaand 1-year investment banking job/training for H).

However, after training/employment K ended took employment in NYC (stayed in NYC for 7 years)

o Length of employment for wife seemed to be tied more to length of her visa than

any temporary activity.

Since they did not leave NYC when their training was complete and instead

got new jobs and stayed for 7 years = NO temporary stay b/c no longer in

NY for a particular purpose.

MATTER OF KALTENBACHER-ROSS (2003):

Argued that a temporary place of abode could not establish that she was a domiciliary of NYC.

Managed to convince court that she only intended to be in NYC temporarily and was only in NYC to

pursue medical school & residency.

o Her intentthroughout her training was to return to NJ to start her practice.

Had made no choice to move to NYC. NEVER wanted to raise family in NYC.

F) Non-Resident Income Allocation GenerallyNY cannot tax a nonresidentunless the income is NY source income

BRADY v. STATE OF NY (1992): basic case on how NY nonresidents are taxed

Taxed on NY income but the tax rate is based on the ENTIRE income earned (in and out of NY)

As if resident tax base NY state will first pretend that you are a resident (even though

you are not) in order to get your tax base.


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o Hypo: $10,000.wages in NY

$500,000.rental income NJ

$510,000.worldwide income

Treat you as if you made $510,000 in NY to determine the income tax rate.

This puts you in a HIGER tax bracket 6.85%

Tax base = $510,000 x 6.85% = $34,935 (approx. 2% of this is nonresident

income)

o GOAL: to ensure everyone is paying tax at the same progressive rate.

Using out of state income to jack up tax base.

Constitutional as long as the rates are applied in non-discriminatory way and only

taxable to NY source income.

20 NYCRR 132.3 Real or Intangible Property EXAM If you have tangible or personal property in NY state = NY source income (despite if you rent or own it)

Nonresidents cannot be taxed on income from INTANGIBLE

20 NYCRR 132.4. Taxed if

(a) Carrying on business within NYS (has office or desk space, factory, shop, etc.) where non-

residence affairs are conducted.

(b) Compensation for personal services

know for EXAM!!!o If your services are performed entirely within NY ALL taxed by NY.

o If your services are performed outside NY NONE is taxed

o If part in and part out of NY work days in NY = amount taxed to NY

Total days worked

non-work days do not count

can argue half-days (if well documented)

see 20 NYCRR 132.18. Earnings of nonresident

employees

MATTER OF ITTLESON (2005):

Change domicile/residence from NYC to South Carolina.

Trying to claim that source income from painting sold at Sothebys should not be taxed by NY.

ISSUE: Whether the painting had obtained a NY situs/minimal connection.


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o For most of the time they were non-residents, the painting wasnt in NY.

o Trying to argue the 11 years it was in the apartment was not relevant.

ALJ bought this argument but it was reversed.

o Unable to just forget the 11 years the painting was in NY it was in NY for the time of sale

and substantial period beforesale.

Must consider the time painting was in NYS + time there for

auction 11 years satisfies minimal connectionswith theNY so the state can tax.

JAMESTOWN ADVISORY OPINION (2007):

Sale by nonresidents (Georgia) of a NY partnership interest

Even though this is a NY partnership Held this was intangible property, which is not taxable.

EXCEPTION: One of the only ways income from an intangible can become taxable by NY

is if its usedfor business in NY.o i.e. if you put if up as collateral for business.

o HERE TPs never used the partnership interest for business in NY so the gain derived from

sale of intangible is not NY source income!!!

G) Convenience of the Employer DoctrineZELINSKY v. TAX APPEAL TRIBUNAL (2003):

Law professor at Cardozo who spent 3 days at the school and the rest at home in Connecticut

Allocated his income among the two, accordingly.

Convenience of the Employer Doctrine must treat days you

worked outside of NY as NY workdays, unless you can show that you

worked out of NY out of thenecessityof the employer, instead of

convenience

o Look to theNATURE of the workcould it have been performed in NY?

SeeMatter of Unterweiserworker locked out of her office (claimed it was not

conducive to her work), thus required to work at home, but job was same as

before so found for NYS.


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Contrast withMatter of Donovanhad to work at home or jobs would be loss

held for TP (only example of this).

o Purpose: To prevent commuters from abusing nonresident income and from

claiming weekends as 2/7 days worked out of NY.

State cant monitor what people are doing at home.

HELD: against TP

HUCKABY v. NYS (2005):

Spends 25% of his time in NY and the rest of his time in TN (company allowed him to)

o He only travelled to NY for meetings when he had to.

chose to work in TN(could have done his work in NY or TN, employer didnt mind) since it was

his choice and he was working for NY employer and deriving benefits from the state,he must pay tax.

o Since he chose to work in TN and it was not for convenience of employer then he

does not get the exception.

MATTER OF FREIDMAN (1999):

Every year Mrs. F gets $100,000 from NY company she is a majority owner in. Company was able to

deduct this as wages.

o She says she didnt work in NY, it was all done in FL.

Exception: CONVENIENCE OF THE EMPLOYER DOCTRINE DOES NOT APPLY

UNLESS YOU SPEND ONE DAY IN NEW YORK!

o Thus, must work one day in NY in order to trigger this doctrine.

Judge says she wasnt really paid to do anything (could have just been dividends)

o She was making herself available for consultations. So, when she was in NY for vacation, she

was just as available (unless she can prove otherwise).

o She performed passive services in NY(held for NYS)

CONVENIENCE OF THE EMPLOYER DOCTRINE does not apply to independent contractors.

AS IFRESIDENT TAX BASE:

Resident Tax x income % 1) R/P - 100/100

( or allocation/ 2) TPP - 0/500

apportionment %) 3) Wages - 250/500 (1/2 days NY)


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4) Intangibles0/800

5) Business Income100/100

Income % = NY AGI (NY source income w/ adjustments)500 = 25% NY tax owed

Fed AGI (Federal income w/ adjustments) 2000

H) Deferred Compensation & Stock OptionsMatter of Stuckless (2006):

Had been a NY resident but during period in question, he was resident of Seattle.

Exercised stock options & Paid in year 7 didnt work at all in that year in NY

o NY is saying that these stock options were derived from employment in NY and thus, should beNY source income.

o Stock option income is treated as wage income thus, should be apportioned.

T8B-M-95[3]I look at the days worked in NY over the period before exercised.

Just because it accrued in value over a multi-year period, you look at the year of exercise b/c

that is the year that matters for stock options.

o So, only the year exercised countswasnt NY resident in that year.

Thus, held for TP.

See p. 303-04 for explanation of stock options (ISO vs. capital gains)

20 NYCRR 132.24 - NY then passed a regulation that says you have to look at the total number of

days worked in NY from Grant Vest period.

20 NYCRR 132.4(c)Bonus Rule

If you get paid a bonus in year 2, for work performed in year 1, you MUST allocate that

money to year 1

Compensation for services rendered in year 1

Matter of Abodeely (2009):

What if TP suddenly moved to FL in the year before he exercised his stock options? Is NY entitled to

anyof this money?

Stucklesshe didnt work anydays in NY during the year of exercise so none is NY source income.

o But this TP isnt working at all hes getting paid $2 million as retirement.


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o Isnt this $2 million attributable to the time worked in NY?

Still held for TP under Stuckless II.

o Income is includible in gross income when ALL events have occurred which fix

right to receive that income and it can be determined with reasonable accuracy.

o NQOs income realized when option exercised.

o Thus income accruable to years when TP didnt work so NY cant tax.

This is really deferred compensation very similar to a bonus!

I) Covenants Not to CompeteMatter of Colitti (2003):

Within the 20 year period, he was granted options most had vested but were not exercised.

o In ISO agreement some shares vested annually. When terminated, TP had rights to the

shares that had already vested.

Agreement: Gets 2 years paid leave and then unpaid leave until 55 (age of retirement) and will retire

thereafter.

o If he retires, he will get a pro rata share of the options he would have gotten (just has to give up

vested options and not compete with company)

NY says this is NY source income (compensation for past services rendered)

If you exchange money in exchange for K not to compete this is NOT NYsource income!!!

o Covenant not to compete is an intangible

o Must get consideration for non-compete clause.

Why was this not NY source income?

o Out of the old and into the new he gave up old stock options b/c he

retired early anyways (these were given for past services rendered). But he got

newstock options in exchange for promise not to compete.

o So the old and new services were severed must argue that thequid pro quohas beensevered.

Matter of Clapes (2005):

Difference with Colittithe stock options were tied with his prior services (despite leaving early). He

didnt get any new stock options for his termination agreement.


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Just b/c you have a non-compete clause, does not mean the stock, etc. will not be

taxablemust severe ties with the past employment (like Colitti).o Promise not to compete must be given for new payment (not for prior

services)!

Why is a promise not to compete not NY source income?

B/c its an intangible so its hard to tie it to NY (unless geographically restricted to NY but

may not work.)

J) Termination PayMatter of McSpadden (1994):

Had an actual employment K for a period of years contractual right to work in the future, but henegotiates his termination in 1990 (years left on K).

Termination agreement:Gets $1.85 million (relinquishment of his right to keep working)

o Court decided it was the present value on amount left on emplo yment K.

HOLDING: This was not NY source income b/c the remaining term value (lump sum payment)

was relinquishment of future employment and an intangible asset.

o Employer was buying outhis employment K for remaining years.

o Tax Division failed to show the future employment would have occurred in NY.

ELEMENTS: To argue something is non-taxable termination

(1) Employment Kcannot be at-will employee.o Must show you have the contractual right to future employment.

(2) Buyout of that K right

o Show amount paid was an arms length price youd pay for the remainder of the K.

Cant be excessive. Must be consistent with the salary and amount of time left on K.

(3) Written Termination Agreement

o THIS MAY NOT BE AN ELEMENT just part of your burden of proof.

Matter of Davis (1999): Tax Dept argued that the did not have any language in the agreement that he was relinquishing his

right to future employment in return for the payments

o Although ALJ rejected this, Tax Dept still maintains this position.

K) Retirement Income & Annuities


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Public Law 104-95 (or USC 114):

As a matter of federal law, no State may tax the retirement income of someone who is

domiciled or a resident of that State.

Retirement Incomeis defined as

1) Certain qualified plans under the IRC (i.e. 401K)

2) Non-qualified plan (so long as its paid out as an annuity)

substantially equal

periodic payments

for at least 10 years

or the life expectancy of the recipient

Public Law 109-264:

Amends Pub. Law 104-95(b)(I) to make it applicable to payments to employees and former

partners.

20 NYCCR 132.4(d). Pensions or other retirement benefits constituting an annuity

NYs own annuity exception that is more detailed and difficult to qualify for.

DONT HAVE TO KNOW THIS FOR EXAM!

L) Accrual RuleMatter of Schibuk (2001):

Residents of NY until September 1988

o Claim accrued in 1986.

Then changed domicile to VT.

Why is this important?

o Received payments from Partnership during their non-resident period, but saying the income

actually accrued in 1986 (when they were residents of NY)

ACCRUAL RULE: Any income received for services rendered for employment in NY aretaxable as NY source income (despite when income is paid).

How does the court deem this 1989/1990 payment accrued in 1986?

o There was a buyout agreement in 1986 that had an original lump sum, but then deferred the

rest of payment of 5 years.

o So, even though received in later year, accrues back to time of K.


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o NY Tax Law 639(a): Forces you to go on accrual method of accounting if you

change your status for resident to non-resident.

IRC:Accrual methodright to receive income had become (1)

fixed and (2) determinable.

ELEMENTS OF ACCRUAL:

(1) Look for change of residency

(2) Look for payments that span non-residency period that relate back to

residency period.

o Look for installment sale!

(3) Can you accrue this case back to residency years?

HYPO:Year 1 = resident (gets $1 million up front); Year 2-5 = non-resident (receives remaining $4

million on installment sale. Should TP pay tax? There is NO way this person doesnt pay NY taxes as a resident on all $5 million b/c the 3

elements above are met.

HYPO:If you reverse it and get the first $1million as a non-resident.

Then TP is not taxed by NY b/c attributable to non-residency period

reverse accrual rule only helps you if its not NY property!!!o So if property is in NY, even if you accrue the payments while not NY

resident, then still taxable by NY.

Contingencies prevent accrual until the K becomes finalized!

Employment Ks are not considered fixed and determinable /c you dont know how long you will live

and work.

M) Constitutional Considerations1) Privileges & Immunities Clause

Only the Article 4 Priv. & Immunities Clause has been triggered in tax (not 14th)


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o this clause ensures that citizens of one state are treated the same in other states (in terms of

jobs, tax, etc.)

Schaffer v. Carter (1920):

Resident of Illinois that has an oil business in OK.

Income Tax; Ok residents paid 100% and they tried to extend it to non-residents(but only to the extent

of the non-residents)

argues: taxing extraterritorial income

o OK only trying to apply this income tax to the businessoperations of non-residents so it

was really an excise tax that residents did not have to pay.

Tries to say: you can tax the land but not the crop, the tree but not the fruit.

o Court disagrees: If it can tax the land within OK, then should be able to tax the business being

done in OK.

MAIN POINTS:o 1) Priv. & Immunities Clause does not ensure immunity from taxation in another

state (there just has to be some legitimate basis for the tax)

no inherent exemption if you are doing business within the state

o 2) There is not a more onerous tax burden.

Residents are actually paying moretax.

Seeformalistic argument on p. 4-6 (dissenting judge)

o At the end of the day the non-residents are being taxed on their property and business in that

state and residents arent

o BUT this wont fly now at the end of the day, just taxing income.

Travis v. Yale & Towne Mfg (1920):

Employees of Conn. corp. (employees lived in NJ and Conn.) but worked in NY

Residents of NY dont begin paying tax on their first $1K or $2K of income (b/c of a special deduction)

o Non-residents dont get this exemption.

claims:

o This is a tax benefit only given to residents

o Creates a higher tax burden for non-resident. TEST: Court is setting forth a reasonable ground basis that NY must meet for law

to be justified.

o NY says that NJ and Conn. could pass income tax laws and afford the same exemption

for their residents but NY is basically legislating for the other states and saying if

they all had discriminatory tax schemes, it would make NYs less discriminatory.

Would be better if they said it was to entice ppl to move to NY.


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HOLDING: NYs law is discriminating against non-residents.

o You cant excuse it b/c the other state could retaliate against you to fix it.

Austin v. New Hampshire (1975):

NHs commuter tax only tax non-residents working in NH (even NH residents are not taxed b/c no

income tax)

TEST: substantial equalityof treatment for the citizens of the taxing state and

nonresident taxpayers

This scheme is unconstitutional b/c the tax falls exclusively on the income of

nonresidents; and it is not offset even approximately by other taxes imposed upon

residents alone (p.4-13).

o Close to a blatant violation of P&I Clause.

Only justification is to divert to NH tax revenues that would otherwise be paid to Maine (not a

justification in the Courts view)

Lunding v. New York (1998):

[the modern day rule of law for P&I in tax]

NY used to allow a pro rata deduction for alimony

o Policy reason that nonresidents be allowed the same non-business deductions as residents

but only get the deduction for % attributable to NY source income.

o Here had 48% of income attributable to NY source income

NY gets rid of non-resident deduction in 1987 Tax Reform Act(same act that created as if

tax)

o as if x NY AGI

Fed AGI

deducts alimony in old way, doesnt use new as if scheme

o So, if he gets the alimony deduction, his federal AGI will be lower than his NY source

income so he will pay more NY income tax.

o However, this would cause nonresident to pay significantly more tax than similarly

situated residents.

o There is a problem with this as if b/c they dont put a cap on the maximum tax (so that NYisnt too great)

In Travis and Shaffer court says States may effectively limit nonresidents deduction of personal

expenses based on the fact that those expenses are related to residence in another state.

o State is trying to argue Shaffer but there NY had a legit. policy reason (to encourage

residents to get life insurance)


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o HERE, they dont have anyreason they dont think that alimony is only attributable to the

home state.

TEST: State must defend its position by demonstrating that

o 1) there is a substantial justification for the difference in treatment? And

o 2) the discrimination practiced against nonresidents bears a substantial

relationshipto the States objective.

[This is prob. a bit above intermediate scrutiny but not quite strict)

ANOTHER TEST: What is thepractical effectof the law??

Is the practical effect of what the state is doing is to actually tax nonresidents more onerously?

Matter of Baum:

Business Allocation Percentage (BAP) calculation to determine the % of business acorporation does in the state.

o Three factors:

(1) Property

(2) Payroll

(3) Receipts

o SBS had a BAP of 76% Boeing is acquiring their stock.

IRC 338(h)(10)election that can create a stocksale as if it were an assetsale.

o If this had been a STOCK sale, non-residents would not be taxed.

o But since this election has been made, the non-residents must pay tax b/c assets located in

NY.

NY argued: You made the election and wanted it to be treated as an asset sale so it must now be

taxedas an asset sale.

In a liquidation, each s/h gets distributions is deemed to give up their stock in exchange for a

share in the sale proceeds.

o FEDERAL INCOME TAX on the deemed asset sale, s/h recognized gain from asset sale.

But b/c of the liquidation, there was a capital loss b/c had very high basis and sale price =

low.o NEW YORKVT corp. does not get the capital loss (pay 2x as much tax)

b/c the s/h are giving up stock in exchange for proceeds STOCK is an intangible

asset and thus, cant get benefit of NY capital loss.

2) Commerce Clause

Kentucky v. Davis (2008):


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[not doing this case]

3) Due Process Clause

Mercantile-Safe Deposit and Trust v. Murphy (1963):

Grantor makes an inter vivostrust that is created in Maryland (although he is NY resident)

o Residency of the trust is based on the residency of the grantor at the time the trust is

made.

This is a resident trust

o Trustee is domiciled in Maryland and trust is administered in Maryland.

o Consists of stocks and bonds these are intangible assets

Intangible assets of a trust are deemed to be located in the

domicile of the trustee.

ISSUE: Can NY tax the trust income that has been accumulated (not distributed)?o NY tries to do that by claiming it was a resident trust b/c grantor was NY resident.

Although the court finds this is a resident trust by letting NY tax the trusts accumulated income (which

is in MD) would violate Due Process b/c NY would be going beyond its taxing powers.

o Due Process state must have minimum connectionsto tax. There were no NY trustees, no NY assets, no NY situs

This case is the basis for

20 NYCC 105.23. Resident estate or trust

(c) NoNYS personal income tax can be imposed on a resident trust ifALL of the following

conditions are met

o (1) All trustees are domiciled in a state other t han NY; and

o (2) Entire corpus of the trust (real and intangible property) is located outside of NY;

and

o (3) All income and gains of the trust are not NY source income.

[if one only one piece of property fails this, the entire income of the trust is still taxable, not

just that one asset]

Petition of Laura J. Silver:

LLC in Delaware with 2 members

o 1% member = managing agent, Laura (NY resident)

o 99% member = Trust

all intangible assets in trust


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NY resident trust (b/c Laura is grantor)

NJ nonresident trustee

If the LLC makes $100 in the year

o Laura makes $1 and pays tax on that

o Trust makes $99 and pays no NY tax b/c it qualifies for the exemption

Its only asset is intangible (the LLC) and it is deemed located in Delaware of where

the nonresident truqstee is.

Trustee in NJ

And any income earned through LLC not in NY.

Laura managed to set up the trust and LLC so that she avoids 99% of the tax!

o This was a tax evasion scheme!

TRUSTS ARE TAXED THE SAME WAY AS INDIVIDUALS!!!

Petition of JP Morgan Chase: (ADVISORY OP)

Involved the Rockefeller trust hadnt paid NY tax

Removed Trustee (to avoid NY tax) and appoint successor trustee who is a bank incorporated under

DE laws.

o Were going to argue there were no NY trustees but the ppl that own the bank were an

advisory panel (all former NY trustees on this panel)

o Thought it was a mechanism where they could have all the same ppl in charge but not have to

pay NY tax.

Advisory Opinion says:

o 1) For Corporations, domicile is not necessarily its state of incorporation.

Look where principal place of business is.

A) Introduction1. Sale/Retail Sale Transaction Tax

Sales Tax a tax on any purchase of tangible property

o Applies unless specifically exempted.

o In NY, all retail sales on tangible property is taxable unless exempted.

Services sales tax does not apply unless specifically enumerated.

o Exact opposite of sales.

o Maintenance/repair to real property (i.e. landscaper) is taxed.


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o Capital improvements are not taxed.

Must be a RETAIL sale Transfer of title or possession forconsideration

o As opposed to RESALE must be some mercantile purpose to it.

2. Measure of Tax

Pay 8.75% of the sale price

What about trade-ins?

o If you buy a car worth $10K but trade-in car worth $3K?

You only pay tax on remaining $7,000 (amount of purchase price reduced after

trade-in)

Theory that once the dealer sells your trade-in car, there will be tax on that

$3,000.

If you buy something for egregiously below FMV, then NY can come in and re-determine tax by sayinggood was actually sold at FMV

3. Destination Tax

Pay the tax based on the rate in place where the service is consumed or

product delivered.

4. TPP vs. Services

Retail sales are taxed (unless exempted)

o TPP = tangible personal property

Services are not unless specifically enumerated

5. Exemptions/Exclusions

Idea of the sales tax is that we dont want to tax ateverylevel

1) Resale As Such Exclusion

o Dont want to tax items for resale

2) Manufacturing Exemption

o Dont want to tax inputs all the costs of production

3) Component Part Resale Exemption

o You dont pay tax if the thing youre buying becomes a physical component part of something

that you then resell.

4) Item Specific

o i.e. you cant tax newspaper periodicals or Bibles (as per Constitution)

o some states dont tax their state flower.


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o In NY farm equipment is not taxed.

B) Taxable Sales Federal Cases (Pomp, Chapter 7)1. Defining a Sale

Any transfer of title or possession or both, exchange or barter, rental, lease or license to use

or consume, conditional or otherwise (p. 7-3)

Alabama v. Delta Air Lines (1978):

TPs bought their tickets in Alabama and have to pay Alabama sales tax on any airline meals (even

though they are served outside Alabama air space)

o Tax incurred when they bought their ticket b/c that is when the right to the meal occurred.

Frisch, Dudek and Slattery v. Wisconsin Dept of Revenue (1986):

ISSUE: Whether a law firm is required to pay sales tax on photocopy charges it bills to its clients?

o Copies were incidental to representation (mostly court documents) but the law firm was not

acting as a Kinkos.

TEST:When a transaction involves the transfer of tangible personal property along with the

performance of a service, the true objective of the purchaser must be considered to

determine whether such transaction is a sale of tangible personal property or the performance

of service with the transfer of personal property merely incidental to performance of service.

o If merely incidental to service do not pay tax.

Here, law firm is not a retailer of copies so no sales tax imposed.

Columbia Pictures v. Tax Commr (Conn. 1979):

Rental or license to exhibit movie Hard Times was a taxable salesince the film was the saleable end

product.

o Personal service exemption doesnt apply.

TEST: Whether the buyer intended to buy an individuals skills or

tangible end product of those skills.o The movie is the real object sought by the buyer (not the services of

making the movie).

The motion picture is licensed out for showing to public. Payment is based on how likely it

is for ppl to watch the movie.

2. Sale for Resale Exemption


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Often incorporates inventory and is defined as an exempt retail sale.

o Other common exemptions are:

purchase of machinery used in manufacturing

purchase of items that will become ingredients or component parts of

manufactured/produced products.

New York exempts retail sales that arefor resale wither as such or as converted into or as a

component part of a product produced for sale by the purchaser.

o In order to be eligible for this exemption, have to be buying the product exclusively for

resale!

If an item is purchased and will be resold without changing form or without

becoming part of another object.

3. Definition of Tangible Personal Property (TPP)

Dine Out Tonight Club v. Dept Rev. (Conn. 1989): solicits membership in its club from Conn. residents ( is Rhode Island corp.) by newspaper and

direct mail advertising.

o Membership gets them a card: one free meal when one purchased. (BOGO).

o Member also gets directory of participating restaurants restaurants only get free

advertising by taking part in this plan.

Conn. sales tax does not extend to sale of intangible assets.o If what the sells and what the members purchase is the RIGHT to free

meals and knowledge of restaurants that provide themclub membershipfees are not subject to sales tax.

o Looked at true object of the transaction.

SeeBarnes & Nobles v. TN Tax Dept B&N sells card entitling customers to discount on

books. No tax b/c no obligation to purchase books in future (merely an intangible right to get

discount in future)

p. 7-37 = pre-paid calling cards taxed at point of sale or as telecom. service or both.

Warranties are a type of insurance, which is not taxed under sales tax.

Idaho State Tax v. Boise Cascade Corp. (1975):

Construction and sale of prefrabricated homes pursuant to existing K did this require tax on

materials used?

o Contractor collects a sales tax on the entire sales price of shell home.

Contractor engaged in constructing pre-fabricated homes is engaged in IMPROVING (not

selling) real property and thus taxed (but only on materials used in construction).


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4. Manufacturing-Related Exemptions

So long as that machine is usedpredominantly and directlyin the manufacturing

of goods for sale, then its exempt from tax.

o If you tax at every level, then they will be passed down to consumer.

Ingredient/Component Exemption purchased item becomes partof another item.

American Stores Packing v. Peters

Cellulose casings used in manufacture of skinless meat products whether the casing is used so that

it will enter into or become an ingredient or component part of finished meat product and thus, not

subject to tax.

SeeU.S. Steel Corp. oxygen injected into molten metal in furnaceso Clearly an essential componentthat entered into the chemical process of making

steel.

HERE cellulose = casing (thus taxable)

o It did not become a part of the end product but remained after the

manufacture.

OAMCO v. Lindley

Asphalt manufacturing plant careful combination of cement done by computer.

TEST: When does the actual manufacturing process being & end?

o Found that the equipment used to preserve required product state + holding bins &

front-loading vehicles are tax exempt b/c directly involved in transforming product

into finished product.

o Truck scales are taxable however.

C) Taxable Sales & Sales for Resale (NY cases)Matter of Weichbrodt (2002):

Owns 4 McDonalds as sole proprietor

o S Corp that TP owns is 100% owner of 4 other McDonalds (100/100 shares)

o S Corp owns another 8 McDonalds also (110/110 shares)

Transfers all McDonalds assets (from his sole proprietorship) to S Corp for 10 shares.


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o Has accomplished getting all McDonalds into corp.

o Instead of transferring to his other S corps he should just have started a NEW S Corp and

transferred those assets

Non-taxable contribution of capital under 351 (re-organization)

Also could have done a contribution of capital to the existing S corps and not taken any

shares!

What is the sales tax for tax consequences of this???

o Arguing in form its a taxable sale but in substance he didnt get anything.

o Remember sales tax is alwaysform over substance.

Must pay $65K on sale of shares.

Transfer of assets from sole proprietorship to a corp. in exchange for stock, where

both entities are wholly owned by the same TP is a sale subject to sales tax(Sunny

Vending Co. v. State Tax Commn)

Matter of Lake Grove Entertainment LLC (2008):

This case centered on two interesting issues.

ISSUE #1: A procedural issue arose involving waivers, or consents given by taxpayers to extend

the statute of limitations in audits.

o TP argued one waiver was not signed by a person authorized to execute the waiver (not an

officer, shareholder, and so on).

The ALJ never reached that issue, however, because a corresponding waiver was also

in the audit file and was signed by a person who had sufficient power to execute the

document.

ISSUE #2: The substantive issue in Lake Groveinvolved sales of party packages.

o The taxpayer sold party packages including food, rock climbing, and ice skating, and charged

one price for the event.

The taxpayer argued that it could remit tax on only the taxable items while charging a

bundled price to the customer.

o Under New York's rules, however, when taxable and nontaxable items are sold for one

bundled price, the entire charge is taxable.

That rule is commonly known as the cheeseboard rule, based on the exampleprovided in the regulations at 20 NYCRR section 527.1(b).5

Applying the cheeseboard rule, the ALJ held that when a single invoice charge

includes taxable and nontaxable components, the entire charge is subject to

tax.


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Cheeseboard Rule If you have a transaction in which you are buying taxable and non-taxable items

bundled as one, you pay tax on EVERYTHING!

o You dont pay sales tax on cheese but will pay tax on pre -made cheeseboard. But if you make

your own cheeseboard, then whole thing tax-free.

EXCEPTION (regulation)If the following 3 are met, then you CANNOT charge tax on the non-

taxable item

o 1) Separately stated amount?

o 2) Separate amount has to be reasonable?

o 3) Can you purchase items separately?

Finch, Pruyn & Co. v. Tully (1979):

Made really nice paper and didnt want to pay tax on the chemicals they us ed in the making of paper.

o Necessary part of paper manufacturing process.

Argument that the vast majority of the chemical is consumed in manufacturing the paper (and onlytrace amounts remain in the paper)

o If 100% had been consumed then not for resale Court says there is nothingin the statute that says a certain amount must be left in the final product

just that it must be a component part(no quantity element)

Contrast American Stores Packing v. Peters (Pomp, 7-49)

Transfer of some part of glycerin used in manufacturing was incidental and not enough to be

component part of product.

CONSIDER THE FOLLOWING CASES TOGETHER

Sta-Ru Corp. (Ill. 1976):

Same as Burger King (1984) held for TP in that case

o Here, held for .

Burger is wrapped in wax paper its a container

o Container is not a resale as such.

The items were incidental to the purchase of food and drinks and the items were

sold as part of the cost of doing business The fast food industry wouldnt survive if you had to give ppl real

glassware and plates disposable containers are a critical element of the

item being resold.

The Division would argue that the fast food restaurants pay tax on other things (such as electricity,

property taxes) so why not the containers?


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Celestial Foods

Stirrers and utensils are not closely connected enough to be a critical element

Only when, as inBurger King, such items are necessary to contain the product for deliverycan they be considered a critical element of the product sold, and excluded from sales tax.

Matter of Dunkin Donuts Mid-Atlantic Distriubtion (1994):

Cant sell the fries/soda without the container but can sell the donuts without the wax paper.

o So Dunkin Donuts had to pay tax on the wax paper since it was used to pick up each donut

and line the box not essentially the same function as inBurger King.

o This is like the Celestial Foods case.

RULE: As a general matter in sale tax, if what you are doing is consuming something in order

to provide something else for sale, what you consume is not for resale (i.e. electricity)

Exceptions:o actually reselling electricity

o component part

o critical element.

SPECTRUM:

Consumption Finch Pruyn Burger King (container cases) Component

Part/Resale as such

THINGS WE MUST KNOW FOR SALES TAX

1) Need a salethis triggers the sales tax

know definition of a sale

o tangible personal property changing hands

o retail sale not for resale

2) Exemption

item specific

dont have to memorize everything that is exempt in NY3) Resale exclusion

excluded from retail sale

dont want to tax inputs that are becoming a component part of an item b/c consumer

bears ultimate cost

4) Can have multiple retail sales of the same item (i.e. selling your own car)

5) Service vs. TPP


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you often see sale of an item with a service (i.e. law firm photocopies)

D) Use & Nexus1. Use Tax

Tax Law 1110 imposes a compensating use tax on every person within the State ofany

tangible personal property purchased at retail.

o Sales tax is a transaction and destination tax.

Thus, if you buy it outside of NY then Sales tax cant apply

So impose a use tax on things you buy outside of the state if you use them 1st

.

o Difference between what the NY tax is and what you paid in

the other state. (Form ST-120 (do within 90 days of buying)

i.e. if you buy a DVD in Mass. (6.5%) and NY tax is 8.75% then you would pay 2.25%

use tax. REQUIREMENTS:

o 1) No NY sales tax was paid or could be paid

o 2) Must have use in NY of the taxable service or TPP

Any act of control or possession in state, including storage for any

amount of time.

o 3) Must be a NY resident

maintain a permanent place of abode.

o 4) You have to be the purchaser

donees are not subject to use tax!

Matter of Amphibian (2008):

formed LLC to shield himself from liability corp. bought airplanes.

o Limitation liability is a perfectly legal express purpose to

incorporate.

Want to go after to be personally responsible for use tax

Pierce Corp. Veil requires showing of:

o 1) owners exercised complete domination of corp. in respect to transaction

attacked, ando 2) such domination was used to commit a fraud or wrong against that resulted

in s injury.

EXEMPTIONIf a foreign corp. was not carrying on any employment, trade, business orprofession in NY then it qualifies for use tax exception

Matter of Grossman (2000):


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Bought gifts back from Europe declared on customs form and paid duty

NYS audited customs form and decided he owed a use tax even though he sent the items out of state

as gifts

o If he had mailed the stuff to his grandkids from Europe instead of NY then he would not

have to pay use tax.

Petition of WTAS:

Art collector living in Free Trade Zone (Geneva, Switzerland) no sales tax can be imposed in this

area.

o X buys artwork from auction house in NY but it is delivered to him in FTZ

ISSUES:

o 1) Does he have to pay sales tax on artwork bought in NY

NO b/c delivery of artwork and transfer of title occurred outside NY

However, if the purchaserbears risk of loss then NYS will challenge thatdelivery occurs outside NY

o 2) Do the kids have to pay sales or use tax on the artwork they inherited from

the estate?

NO sales tax b/c did not purchase artwork from estate

NO use tax b/c did not buy the artwork (not required to give any consideration for

artwork)

B/c they are not purchasers (they are donees) they are not liable for use

tax.

o 3) Do the kids have to pay sales tax on the bequeathed stocks?

NO intangible assets are not subject to sales taxNYCRR

526.8(c)(2).

o 4) Does ex-wife have to pay use tax on furniture she brings from France to

NY?

NO she was not a resident of NY at the time she purchased the items, so she does

not have to pay tax on it when she brings it into NY years later.

HYPO: Guy buys earrings for his wife and wants them delivered to her in NYC. He arranges for FedEx to deliver it. He has to pay tax b/c he did not use US Postal Service = common carrier

FedEx was an agent of the TP.

2. Nexus


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Minimum connections that an out-of-state vendor/company must have on the taxing jurisdiction

before they can impose sales tax obligations.

o NY cant require an out-of-state vendor to file a return or register if they do not have a nexus

with NY.

National Bellas Hess v. Dept of Revenue (1967):

o Catalogue company

Interstate commerce implicated

Due process havent availed themselves of benefits of state.

o If your only connection is soliciting sales and delivering orders through common

carriers insufficient amount of presence for nexus.

o For sales tax purposes, there must besomephysical presence.

Quill (1992):o Reaffirmed Bellas that physical presence was required.

o In todays day and age with the expansion of the market and

globalization, everyone is on fair notice that you can get taxed (sono longer a due process issue)

Only a commerce clause restraint this gives Congress broad power b/c states cant

interfere in federal commerce even if federal govt hasnt acted or else it can be

invalidated (dormant commerce clause)

Orvis (1995):

o In order not to impose tax without violating Commerce Clause, the TPs activities in NY had to

be morethan a slightest presence

Does not need to be substantial physical presence.

BRIGHT LINE RULEFor nexus must have a physical presence

It must be more than aslight presence.

THINGS THAT GIVE YOU NEXUS& MAKE YOU SUBJECT TO TAX IN MOST STATES

Independent Contractors esp if they are soliciting sales

o In NY it doesnt matter whether theyre soliciting sales.

o i.e. doing warranty repair services.

Employees


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o Who generally are soliciting sales

Property

o Real -- Office or manufacturing

o Inventory

o Staturory exception: fulfillment house just holds inventory.

JC Newman Cigar Company (2007):

[Talked about the cases above key quotes]

Petition of Bass Pro Outdoor World:

(1) Bass Pro, Inc. (Delaware) is parent company of

o (a) Bass Pro Outdoor World, LLC(Missouri) has 10 retail stores in different states and want

to open one in NYo (b) Catalog LP (Missouri) mail order in various states (including NY)

no physical presence in NY fits Bellas Hess and Quill exceptions.

ISSUE: Would the brick & mortar retail store in NY give the Catalog LP nexus so that they have to

pay sales tax in NY???

o NO they are not alter egosof each other. Catalog is its own separate legal entity so we

respect the corporate form.

Keep a separate inventory, separate accounting & legal staff.

Advertising and solicitation were not so co-mingled

Are the officers & directors the same?

In order to pierce the corporate veil, must show:

o 1) the owners exercised complete domination of the corp. in respect to the transaction attacked;

o 2) such domination was used to commit fraud or wrong against which resulted in s injury

St. Tammany Parish v. Barnesandnoble.com (2007):

St. Tammany had a Barnes & Noble retail store and was suing website for sales tax.

Found that substantial nexus did not existo Even though they were being referred to the website and retail store would treat websites

inventory as its own.

o They did not hold themselves out as the same entity.

o Nature and extent of activities performed by Booksellers on behalf of Online were insufficient to

treat Booksellers as acting as marketing presence for Online in Parish.


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E) Derivative Liabilities Bulk SalesTax Law 1141(c):

1) Purchaser must file bulk sale notice within at least 10 days before transaction

o If purchaser fails to do this, then they become asuccessor in interest and is liable for

the sellers outstanding sales and use tax.

o Even if you one day late and NY is not prejudiced in any way (can timely do the other

things) then you are still liable for all taxes.

2) NYS has 5 days to give notice of possible claims, unless

o If NYS fails to do this and you have given your timely notice you are relieved ofany tax liability

This is not statutory, but regulatory if Step #1 not completed, then NYSdoesnt have to complete this.

3) Then NYS has 90 days to notify purchaser of amount due (SOL)

o Purchaser is supposed to hold part of the sales price in escrow to pay this outstanding

debtNYS gets money from sale before seller.

But you are liable up to the amount of the sales price but may be difficult to

ascertain how much to put aside.

This often holds up sales

o Step #1 tolls the SOL NYS has 90 days to assess tax.

If you have a business X Corp. that has a bunch of assets (inventory, office supplies, etc.) and X Corp.

has sales tax outstanding. If X sells to Y all of its assets, how can NY get the sales tax Y owe???

Anytime you have an assignment, sale or transfer in bulk or any part of the whole of a business

The purchaser must notify NYS within 10 days that sale will take place

o If you dont do that NYS can hold purchaser liable for sellers sales tax as an

accessory in interest.

o Purchaser is supposed to hold the money in escrow and then give NYS a portion of

the sales price that is due for Ys sale taxes owed. In NY it can only be ONE asset doesnt have to be a majority of the assets. MUST BE THE SALE/TRANSFER/ASIGNMENT OF BUSINESS ASSET!!!

o There does not have to be consideration to be a bulk sale can be transfer ofgoodwill or even a GIFT!

Must have:o 1) Sale or Transfer or Assignment of


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o 2) Business Assetso 3) Out of regular course of business

Matter of Rony Enterprises (2006):

Sets out rules above.

Purchase of convenient store.

o Cannot assert 5 day SOL defense b/c did not file timely so burden is not on NYS.

North Cadillac-Oldsmobile v. Tax Appeals Tribunal (2004):

Bank is a secured creditor and are foreclosing on North Cadillac for mortgage.

o Convinced bank that they would get more thru private sale (instead of public auction where get

less than FMV)

Hold the private sale

sells to Northshore Cadillaco NYS claims this was a bulk sale

o tries to use the lien satisfaction exception

EXCEPTION: Transfers made to satisfy a secured lien (20 NYCRR 537.1)

o Only when the transfer is made directly to the bank (holder of security) or

assignee to satisfy the debt.

Credit cards are unsecured vs. mortgage is secured

Here the exception did not apply b/c the property was transferred by (not bank) to buyer

o Bank did not solicit, direct or in any way control the sale of the assets to .

Matter of EON J&P Corp. (2004):

[didnt go over in class]

Matter of Siegels Kosher Deli (2005):

Owners of 1646 Deli liquidate its assets in tax-free reorganization (corp. tax) and the same

owners/shareholders used these assets to create Siegels Kosher Deli.

o Avoided paying sales and income taxes on this reorg.

o BUT 1646 Deli owed back sales and use taxes so NYS goes after them for bulk sale. Attorneys here were confusing RETAIL sale with BULK sale.

o NYS says there has been a transfer of business assets outside of regular course of business

doesnt matter that there was no sales tax due on liquidation.

20 NYCRR 537.1(a)(2): The fact that a sale is or is not a retail sale does not

determine whether such sale is a bulk sale

o Same business, same owners new name


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This is exactly the situation that bulk sales try to avoid

also tries to argue there was no consideration

o doesnt matter there is no consideration.

Matter of New Lins Buffet (2007):

[didnt go over in class]

F) Derivative Liabilities Responsible PersonsTax Law 1131(1). Responsible Persons

The officer or majority s/h can be held personally responsible for back taxes of the company if

they are a responsible person

o Authority and control over the day-to-day and financial matters of the business dont have to exercise, just have this authority

Majority owner or officer

Check-signing

Filling out and signing tax returns

Hiring and firing employees

Get dividends or majority of salary from business

o If you have the authority but turn a blind eye or delegate this does not relieve you of

liability.

C and S Corp. Rules: must show they are a responsible person (control, s/h, director, etc.)

LLC/Partnership Rules: Any member of an LLC or partnership isper se liable for

o No distinction between general and limited partners.

Tax Law 1133. Personally Liable

?

Matter of Bartolomei (1997):

Where a person is both a limited partner and an officer/director/shareholder of a corp.

GP that person must prove that any relevant actions were performed solely in thecapacity of director/etc. of general partner.

Limited partner like here (who was actively involved) is responsible.

There is NO distinction in statute between GP and LP.

Matter of Constantino (1990):

The question in any case is:


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o Whether an individual is under a duty to act for a corporation with regard to its tax

collection responsibilities so that the individual would have personal liability for the

taxes not collected or paid depends on the facts.

FACTORS INDICIA OF RESPONSIBILITY:

o Individuals status as officer, director or s/h

o Authorization to write checks on behalf of corp

o [finish these]

This was a shareholder and did have check-signing authority but his role was that of a minority

investor and supervising employee

o He had no control over the business.

He could not do anything without the majority shareholders approval

Did not have sufficient authority.

o Only signed payroll checks

o Majority s/h made all decisions.

Matter of McGinnis (2003):

was 50% owner of company and derived all income from corp. had significant authority and control over

business.

Matter of Gemmette (2006):

was not a corp. officer merely an employee who helped her father at the bar.

None of the returns had her name and she had NO authority

Thus, NOT responsible for collection and payment of tax.

Matter of Apple (2006):

here actually once signed a check in payment of sales and use tax.

s name was listed on tax returns.

His home address was also used at certain times as business address for corp.

Matter of Bleistein (1995):

SOL to assess tax had been extended for the company (by waiver)

o State couldnt produce any waivers for the RPo Usually you gives NYS a waiver when they havent completed their audit and the

client has not been cooperating.

Dont give NYS an audit if they have an estimated assessment but they

have wasted time starting audit

NYS often mess it up and assess the tax to the corp. but not the RP and by the time they figure

out who RP is, the SOL has run


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State has generally 3 years from the date return is filed to assess additional tax.

SOL is tolled until return is filed.

If there is fraud in sale tax no SOL at all for assessment of tax

If there is a substantial understatement in income taxes no SOL.

Matter of Mackiewicz (2007):

Arguing that since penalties and interest abated for corp, should also be for RP.

o Derivative liabilities responsible person is derivative in nature and can only

be held liable for the amount the corporation owes

So if there is an abatement of penalties for corporation, then the responsible person

also gets those penalties abated.

Matter of Taylor (1991): This shows that if after you look at the indicia, you have to ask whether they reallyhave the authority

o Here, was manager but was puppet of criminals they were directing his actions and he

had no real authority he acted under their supervision and control.

o If his authority was thwarted then he would also not be liable.

If you are in a position of authority and you turn a blind eye you will still be liable BUT if the wrongdoings of 3rd parties impede you from carrying out your duties

then you are off the hook.

THIS DOES NOT APPLY TO LLC and PARTNERSHIPS B/C PER SE LIABILITY

A) Historical Background Franchise Taxbased on companies net income Income Tax direct tax on income of the business.

Under COMMERCE CLAUSE state couldnt tax the privilege of doing business (formalistic approach)

But you could directly impose tax on the income of the business b/c it wasnt a tax on the privilege of

doing business.

This has now been done away with and Franchise = Income Tax.


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B) Conceptual OverviewMethods for Dividing, Sharing, or Assigning the Tax Base of a Corporation

Engaged in Cross-Border Transactions

PURPOSE OF CORPORATE TAX: Trying to figure out how much interstate

companies much pay to each state.

o Need to make a determination between their business income vs. non-business income

(i.e. investments)

o Apportion that income based on separate accounting or formulary

(1)SEPARATE ACCOUNTING Tries to avoid the formula and look at what income is apportioned to specific activities.

If the only thing you do in NY is manufacture, you can determine how much of the $100 million is

attributable to NY.

o Transfer pricingPretend that each phase is a separate entity (figure out how much thatentity would charge to manufacture)

Seeks to isolate the activity and attribute the activity to the isolated state

o However it doesnt take into account

1) interdependencies

2) integration

3) synergies.

o Things happen in one part and other parts feed off this action

i.e. Manufacturing occurs in State A but research in State B (call back and forth

to make widget)

All this is transferred into the price of State A so State B gets no benefit.

EVERYONE USED TO USE THIS METHOD

But is unfair to some states b/c it doesnt reflect all the profit of some states So most states require formulary unless it would result in some injustice

(2)FORMULARY APPORTIONMENT Allocate or apportion the income based on the following FACTORS:

o (1) Property

o (2) Payroll


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o (3) Sales/Receipt

[Looking at amount of each of these factors within the state vs. worldwide]

But not every state uses the formula and not all states use the same formula.

o Often they double up sales formula

o NY single factor formula (sales only)

Only makes you pay taxes to the extent you have sales.

Dont want to penalize by merely having a job in NY or owning property in NY

encourage new business and new jobs.

a) THE FORMULATIA = TIWW x 1 SalesA + PayrollA + SalesA

3 SalesWW PayrollWW SalesWW

Figures out the income allocated to the state by taking the worldwide sales and multiplying them by

fractions of the factors above.o Once you figure

b) INTERACTION OF APPORTIONMENT FORMULA & P.L. 86-272 P.L. 86-272

o Federal law

o Only applies to income taxes

o Prevents states from taxing the income of a corporation whose only business activities

within the state are

1) Solicitation solicitation of orders

2) TPP

for personal tangible property

3) Out-of-state fulfillment

orders must go out of state to be approved and goods are delivered fromoutside state

EXAMPLE: State A has property and payroll. State B is only the site of sales solicitation. State A tax 2/3 (payroll and property)

o So pay 66.67% of taxes on the $100 million income.

State B NO tax b/c P.L. 86-272 applies and prevents tax on mere solicitation of saleso So 33.3% of the tax has disappeared (like disappearing wealth phenomena)

States do a lot of things to prevent this from happening!!!


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State A may not allow you to apportion your income among states (unless you will be subject to tax in

State B and P.L. 86-272 wont prevent them from taxing your sales)

Throw-back Rule Make you throw-back all your income to the originating stateo Version #1:You must throw back your sales, unless

1) You are subject to tax in the other state, and

2) The other state must have jurisdiction to tax you (P.L. 86-272 doesnt apply),

regardless of whether they choose to exercise this juris.

o Version #2: You must throw back, unless

1) You are subject to tax in State B, and

2) You actuallypay tax in State B

many companies try to pay de minimis amount to State B so this will apply

(sometimes succeed)

Throw-Out Rule Make you throw out sales in the non-taxing state

o Take the sales out of denominator and numerator so ends up being 1/1 fraction

o NOT ON EXAM!

d) WHAT INCOME IS APPORTIONABLE? Unitary-Business Principlelooks at all elements of the business that make up the unitary

business.

o i.e. if Corp. has subsidiary X in State A and sub. Y in State B they are both part of the pie b/c

X and Y are both integral parts of Cs business.

[see diagram on p.10-27]

If we didnt have this rule, then State A would tax only X and State B would tax only Y

o If any portion of that pie has nexus with NY, then NY can tax ALL of it.

The income a state apportions must be attributable to the activities of a unitary

business, part of which is conducted in the taxing state.

WE DO NOT NEED TO KNOW THAT FACTORS INDICIA OFUNITARY BUSINESSo He will just tell us its a unitary business.

o He will also tell us whether something is business (results from the

operation or sales of business) vs. non-business income (stock

investments)

If unitary business kicks in you cannot do separate accounting.

OVERRIDING FACTORS 1) Does the corp. have NEXUS with the state?

o State needs nexus to tax the corp.


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o SALES & USE TAXsome sort of physical presence.

Not clear whether this applies to corporate income tax.

o NY is moving towards saying that aneconomic presencewill be enough to give you nexus to tax.

C) Congressional Limits on Taxing PowerWisconsin Dept. of Revenue v. Wrigley (1992):

Wrigley = world's largest manufacturer of chewing gum, was based in Chicago.

ISSUE: whether the company's activities in Wisc

state and local outline

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