A lawyer practicing in New York State and living in New York generally is subject to New York State income tax. But what if a New York attorney lived in Florida and his only case was handled there? Recently the Division of Taxation (“Division”) took the aggressive position that a nonresident attorney with a license to practice in New York had New York source income, even though no legal work had been done in New York. In a scathing opinion, an Administrative Law Judge disagreed with the Division and held that no New York State tax was due.[i]
Attorney Patrick J. Carr moved from New York to Florida, and in the audit years, all of his income from legal services came from one case he worked on while retired and living in Florida. Mr. Carr was admitted to the Bar in New York and New Jersey but not in Florida; the Florida judge on the case granted him permission to litigate this specific case in Florida.
The New York State audit began with a review of whether Mr. Carr had changed his domicile from New York to Florida. After conceding on domicile, the Division asserted that Mr. Carr had allocated his income incorrectly. As a nonresident of New York, Mr. Carr could be taxed on income derived from New York sources, including income from a business, trade or profession carried on in New York. According to the Division, Mr. Carr’s income from the practice of law derived from the law license he had in NYS. The Division contended that the Florida judge relied on the New York law license in allowing Mr. Carr to practice in Florida. Therefore, the income was “attributable to a profession carried out in New York State” and subject to NYS income tax.
Not so, said the Administrative Law Judge. Instead, the ALJ held, “Contrary to the Division’s contention, merely holding a license to practice in New York is not the equivalent of carrying on a profession in New York State. Rather, the regulations provide that a business or profession is carried on in New York if the business’s activities are “systematically and regularly carried on” and conducted in New York with a fair measure of permanency and continuity.” [citations omitted] Further, Mr. Carr was admitted in New Jersey and New York, and there was no indication that the New York license was determinative for the Florida judge.
The Division relied on prior cases where a New York attorney was subject to tax for legal services carried on outside of the State.[i] In distinguishing Mr. Carr’s situation, the ALJ noted that unlike the taxpayers in the cases cited by the Division, Mr. Carr had no office in New York where he regularly carried on business, and he was licensed in more than one jurisdiction. Mr. Carr’s office was in Florida, and all the legal services were performed in Florida.
The ALJ also criticized the Division for ignoring its own rules regarding allocation. Rather than calculate the proportion of income for services performed in and out of New York, the Division contended that all of the income was allocated to New York, regardless of where the services were performed. The ALJ stated pointedly, “If the Division wishes to depart from the rules [regarding allocation] and create a separate set of new rules for nonresident attorneys licensed to practice in New York, such change should be effected through legislation or adopted in regulations …. “[citations omitted]
The Carr decision highlights the lengths that auditors may go in seeking to tax a nonresident. The rules are complex and practitioners need to be aware of the risks and pitfalls in determining when a taxpayer’s income is subject to New York State tax. Circumstances may vary; and specific facts, such as whether a taxpayer had an office in New York or another professional license, can lead to vastly different results.
[i] Matter of Patrick J. Carr, Admin. Law Judge (DTA No. 825989, July 23, 2015). Determinations of administrative law judges are not considered as precedent.
[i] Carpenter v. Chapman, 276 AD 634 (3rd Dept. 1950); Matter of Vigliano, N.Y. Tax Appeals Tribunal (1994)
*Yvonne R. Cort, Esq., has been selected as a New York Metro SuperLawyer for 2015. She is a former Chair of the Nassau County Bar Association Tax Law Committee and a former Chair of the IRS Long Island Tax Practitioner Liaison Committee. She lectures and publishes frequently on tax topics. Yvonne is counsel with the Melville, N.Y. tax law firm of Tenenbaum Law, P.C., www.litaxattorney.com, where her practice focuses on New York state and IRS tax controversies. She can be reached at firstname.lastname@example.org or 631-465-5000.