Wednesday, February 23, 2011

The Cost of Maintaining a Vacation Home or Pied-à-Terre in New York

The New York Tax Appeals Tribunal has issued an opinion reflecting a willingness to accede to state tax authorities’ aggressive approach with respect to non-New Yorkers who maintain vacation homes or pied-à-terres in New York. In Barker 1, the Tax Appeals Tribunal held that a couple who maintained a primary residence in Connecticut and owned a small vacation home near the Hamptons area of Long Island were considered New York residents for state tax purposes.

The couple lived in, and were domiciled in, Connecticut where they raised their three children. Mr. Barker commuted to a job in New York City and was, therefore, physically present in New York State more than 183 days during the year. The couple used their modest (approximately 1100 square foot) house in Long Island approximately 18 days a year but permitted Mrs. Barker’s parents (unquestionably New York residents) to use the house; her parents spent considerably more time there than the Barkers.

The tax tribunal concluded that the home was not a “mere … cottage, which is suitable and used only for vacations” (emphasis added); this would have been the only way the vacation home could not have been considered a “permanent place of abode.” The tribunal noted that “[t]here is no requirement that [a taxpayer] actually dwell in the [New York] abode, but simply that he maintain it.” Since Mr. Barker was present in New York at least 183 days in each year at issue (even though his presence was unrelated to the vacation home), the tribunal concluded that Mr. Barker was a New York resident subject to New York tax on his global income.

It is unclear how New York State tax authorities will apply the Barker decision but there are a number of significant concerns that owners of second residences in New York should consider. Of first importance, a person’s presence in New York state for 183 days or more during any year coupled with ownership of residential real estate may cause such person to be considered a New York resident taxable on all income from global (i.e., non-New York) sources. The exception for a “cottage” may be of limited utility. Moreover, actual usage of the residence may not matter.

Persons filing New York State nonresident tax returns are asked on their returns to indicate whether they maintain a residence in New York State and, if so, the number of days on which they are present in New York. For the first time this year, New York State residents who maintain a second residence in New York City must indicate on their New York State tax returns how many days they spend in New York City. This new requirement may signal an increase in interest in collecting tax from persons maintaining pied-à-terres in New York City.

1. In the Matter of the Petition of John J. and Laura Barker, New York Tax Appeals Tribunal, Docket 822324 (01/13/2011).


Thursday, February 17, 2011

Offshore Voluntary Disclosure Initiative

On February 8, 2011, the Internal Revenue Service (“IRS”) announced an Offshore Voluntary Disclosure Initiative (“OVDI”) designed to bring taxpayers with direct or indirect undisclosed foreign financial accounts into compliance with United States tax laws. The 2011 OVDI is modeled after a similar voluntary disclosure program in 2009, with two significant differences. First, the basic penalty imposed under the 2011 program (described below) is 25% rather than 20%. Second, the 2011 program covers eight years, 2003 through 2010, rather than six years as under the 2009 program. The OVDI will remain open through August 31, 2011.

Taxpayers who participate in the OVDI will pay a penalty of 25% of the highest aggregate balance in foreign bank accounts or value of foreign assets in any of the eight years covered by the OVDI. This penalty, which may in limited cases be reduced to 12.5% or 5%, is in lieu of penalties otherwise incurred under Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts” (“FBARs”), and other penalties that would otherwise apply.

In addition, persons participating in the OVDI will be required to pay income tax on previously unreported income for all years 2003 through 2010 and will be subject to a 20% accuracy-related penalty on the amount of all such underpayments of tax. Failure to file and failure to pay penalties may apply, if applicable under an OVDI participant’s particular facts or circumstances. Interest will accrue on taxes owed.

Taxpayers who choose to participate in the OVDI will be required to:
• Provide the IRS with copies of previously filed original or amended federal income tax returns for the tax years covered by the OVDI,
• File amended returns reflecting previously unreported income from foreign accounts and foreign entities,
• File complete and accurate FBARs,
• Pay taxes, penalties and interest in full, and
• Execute a closing agreement with the IRS.

In addition, the IRS requires submission of certain forms and statements that were not required in the 2009 program. All required documentation must be submitted on or before August 31, 2011.