Noonan’s Notes Blog

A couple weeks ago, the Third Department of the New York Supreme Court, Appellate Division issued its decision in Matter of Schreiber, reversing a prior decision of the Tax Appeals Tribunal, finding that its interpretation of Tax Law § 16(f)(2)(C) and Matter of Purcell, both related to the calculation of qualified empire zone enterprise (QEZE) tax reduction credits, was irrational. We’ve been following this issue for almost a decade, dating back to our review and analysis of the Purcell case, which you can read about here. The Schreiber case presents an interesting new twist in the story, and the Court’s analysis could impact cases beyond the realm of QEZE credits.

In an unfortunate blow to Taxpayers, the Washington State Supreme Court ruled 7-2 on Friday, March 24, 2023, to uphold the constitutionality of the state’s capital gains tax. The ruling comes as a sharp reversal of a lower court decision striking down the tax as unconstitutional, which we reported on here.

As residents and SALT practitioners in New York, we see firsthand how high income tax rates drive the personal decision making of taxpayers as well as enforcement efforts by tax departments. On the taxpayer side, we’ve seen tangible (albeit anecdotal) evidence that taxpayers will make decisions on where to work or live based on their taxes. We saw this in 2018 with the explosion of moves following the implementation of the SALT cap, and again in New York in 2021 when, combined with Covid, taxpayers exited New York at a record-breaking pace, coincidentally around the time that the New York legislature raised the highest combined tax rate for New York State and City resident taxpayers to 14.7%. Of course, over the years New York has become somewhat of a leader in personal income tax enforcement, particularly in the residency area, to address the movement of taxpayers both in and out of the state. For example, over the course of 2018 through 2022, the tax department reports performing over four thousand residency audits per year. More recently, the tax department has put in place a massive “desk audit” program specifically to have a process that immediately questions taxpayers who left the state in 2020 or 2021.

Without even a hint of fanfare, the New York State Department of Taxation and Finance recently released a new version of its audit guidelines for nonresidents. Given that the last update was in 2014, we easily excited tax lawyers cracked them open to find out what had changed. But when we dug into the new guidelines, we were disappointed to see only minor stylistic edits. 

On Tuesday, March 1, 2022, Washington State Superior Court Judge Brian Huber released a ruling striking down the state’s new capital gains tax. The law—signed by Governor Jay Inslee last May—imposes a 7% tax on the sale of stocks, bonds, and other assets above $250,000. When signed, Washington became the first state in the country with no income tax to impose a tax on capital gains.

Recently, the New York State Department of Taxation & Finance released new nonresident audit guidelines, without any announcement or fanfare. Being the first official update to the guidelines since 2014, we were excited to crack them open! But, alas, our hopes were soon dashed; the changes to the guidelines turned out to be mostly minor.

Recently, we’ve witnessed a mass exodus from New York State as a result of the COVID-19 pandemic. Some movers yearn for warmer weather, others for more reasonable Covid policies, and others simply seek a home-state that won’t tax their personal income. When we advise these moving individuals on their domicile change, a question we’re receiving with increasing frequency is “after I move, can I continue to make donations to my favorite local charities, or will New York State use that information against me in a determination of my domicile?” We understand why people are concerned at the possibility that their charitable contributions might be weaponized against them. After all, in a domicile audit, New York auditors are instructed to analyze the taxpayer’s lifestyle, using five primary factors: home, time, business activity, near & dear, and family.

On October 5, 2021, the Second Circuit Court of Appeals declared that the federal $10,000 SALT deduction cap is constitutional. The long-awaited ruling affirms a decision by U.S. District Court Judge J. Paul Oetken, which we covered here. The SALT deduction was first capped at $10,000 as part of former President Trump’s Tax Cuts and Jobs Act of 2017 (TCJA).