Trump's trial in New York raises questions about state tax residency

The Manhattan District Attorney's Office unwittingly entered the world of federal taxation by indicting Donald Trump, who could gain legal residency in New York as a result of his criminal indictment for allegedly falsifying business records.

Individuals are considered New York residents for tax purposes if they are domiciled in New York or if they spend more than 183 days in the state and are a permanent resident of New York for substantially the entire taxable year.

Trump is not a resident of New York but owns a unit in Trump Tower and could potentially stay in the state for longer than 183 days because of his legal troubles.

For anyone in a similar position—including executives subpoenaed on civil matters that require in-person presence in New York—these factors increase the complexity of state tax analysis. The question depends on whether New York considers court appearances, personal interviews, or even possible incarceration (however unlikely) to be tax-free for state tax purposes.

Residency tests

New York taxes nonresidents only on their New York source income using one of two tests to determine residency.

The domicile test focuses on the person's “home” and takes into account five main factors: actual home, active business involvement, time spent, close and expensive items, and family connections. Involuntary stays should not affect this factor as long as the taxpayer does not choose to spend time in the state.

The statutory test examines whether an individual is a permanent resident of New York for virtually the entire tax year and spends more than 183 days in the state. New York City applies the same rule for residents but does not impose a tax on non-residents. Any portion of a day spent in New York will be considered a full day for purposes of determining a “New York” day, except for travel within the State and the need to remain in the State for medical reasons.

Although involuntary medical stays have been addressed, New York does not appear to have guidance on the residency test or the legal residency test for individuals who are incarcerated or defending against charges brought by New York or its municipalities.

Involuntary stays

Although there is a lack of guidance on involuntary stays other than medical conditions, the same logic should apply to other involuntary stays.

A morbid but obvious example would be that a kidnapped non-resident could not obtain residency in New York because his captor held him in the state. The reason for this is that the stay was clearly involuntary and was not the person's intention to make New York his or her residence, which is no different from the guidelines for involuntary medical stays.

The same logic for both the medical exception and the kidnapping example should apply to mandatory court appearances and detentions. If a person does not choose to remain in the state but is otherwise involuntarily there – whether for medical or legal reasons – New York should not count those days toward the 183-day rule.

For Trump, the problem may lie in the details when it comes to determining a New York “day” and what is involuntary. Judge Juan Merchan, who is presiding over Trump's criminal trial, said he “needs to be here.” For the purposes of the trial, Merchan made it clear that participation was not voluntary.

Other days he spent in New York may not be so clear – a voluntary meeting with his lawyers in New York may or may not count as a New York “day.” The question is whether a meeting or event related to the indictment counts as a New York “day” because Trump is not choosing to be in the state for any reason other than the indictment itself.

The question is whether Trump should be able to maximize his chances of success in defending the charges without risking such days being counted toward his stay in New York.

The argument for Trump (or others in a similar position) is that without the indictment, he would not meet with the district attorney, attend a court hearing, or otherwise defend the indictment, no matter where or how he wants to defend the case. The argument against this is that he could hold remote meetings if he wanted to.

Questions about civil matters

We would expect that most people considering incarceration would argue that the reasoning applies to days spent in prison involuntarily. However, the same logic may also apply to court-ordered civil subpoenas requiring an individual (e.g., a corporate executive) to have an in-person interview in New York.

In court-ordered appearances or detention, the state could attempt to distinguish whether the person could have known the consequences of illegal actions, including that they were in New York in defense of such actions. Voluntarily committing an illegal act does not result in an involuntary stay in New York, as one must be held accountable for that act. But does this also apply to civil subpoenas?

Could the state argue that a company executive expected to be subpoenaed in New York because his company was doing business in the state? There is no direct guide to answering this question.

However, in Stranahan v. New York State Tax Commission, A New York appeals court ruled that an involuntary stay at a medical facility for treatment of an illness did not count as a day in New York for the legal residency test.

The case involved a woman from outside New York who chose to attend Sloan Kettering Memorial Hospital in New York because it offered “the most modern facilities to treat her condition.” When she got there, the doctors advised her not to go.

While the question of the number of legal days of stay may not be of primary interest to Trump or the New York District Attorney, it raises an interesting question for anyone who may enter New York “involuntarily.” The main question is whether their stay is actually involuntary and whether it is comparable to that Stranahan.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Information about the author

David Pope is a state and local tax partner at DLA Piper in New York.

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