Residence, for tax purposes

by James Gust
Senior Editor, Merrill Anderson Co., Inc.

Hedge fund manager Julian Robertson and his wife reside part-time in New York City. In 1999, while Mrs. Robertson was battling cancer, Mr. Robertson did not keep track of his daily comings and goings, and so he paid New York City income taxes for that year.

In 2000, he took a different approach, employing his staff and a complicated, computerized calendaring system to track his whereabouts throughout the year. At the end of 2000, all but four days were clearly documented, with 183 days spent within New York City and 179 days spent outside of it. The remaining four days were ambiguous, and a trial ensued. Phone records and travel vouchers were examined in detail, and testimony was taken from witnesses. (Only New York City income taxes, not those of New York State, were at issue in this case.)

According to the Court, “Any day the petitioner was physically present in New York City, even for five minutes, was a ‘New York City’ day unless he was in transit between two points outside New York City.”

The judge’s ruling, running to 77 pages, held that during the four disputed days, Robertson was not in New York City. As a result, he did not owe any New York City income tax for that year, a savings for him of more than $27 million.

The case points out the importance of excellent records when it comes to resolving residency questions in tax disputes.

The death tax angle

Residency and taxation questions are not of concern only to the super-rich, such as the Robertsons. State death taxes (estate taxes, inheritance taxes, or both) vary widely around the country. Some states have eliminated their death taxes; some have matched the federal exemptions; still others have “decoupled” from the federal estate tax-exempt amounts. These latter states may impose significant death taxes on estates too small to be subject to federal estate tax.

The issue is especially thorny for families that own property in more than one state. They may be subject to death taxes in each of the states where property is situated. In rare cases, more than one state may claim the authority to impose death taxes on the entire estate.

If there is a chance that your estate might be subject to avoidable taxation, be sure to consult with your tax advisors about your tax planning choices. These may include, as for the Robertson family, documenting your primary residence for tax purposes.