A New York S-corporation shareholder who moved to Virginia asks three questions: (1) are dividends paid out of his corporation's accumulated earnings from the years it was a New York C corporation taxable to him as a nonresident for New York personal income tax purposes; (2) if he later buys another business in New York, does that purchase - by itself, whether he moves back right away, moves back later, or never moves back and runs it from Virginia - change his New York residency status; and (3) if he doesn't buy the New York business and simply stays in Virginia, will he be treated as a New York nonresident?

Plain-English summary

Mahmoud A. Mahmoud owned 40% of Azab & Company, Inc., a business his wife (also 40%) and children (20%) owned the rest of. Azab was incorporated in New York in November 1984 and elected federal S-corporation status in September 1985. On the New York side, though, Azab's status bounced around: it was a New York C corporation from incorporation through 1987, elected New York S-corporation status for 1988 and 1989, reverted to New York C-corporation status for 1990 and 1991, and had applied for New York S-corporation status again for 1992. Azab had New York-source earnings only in 1988 and 1989, and by the time of this opinion it had no New York sales and owned no New York property. Critically, Azab still held retained earnings accumulated during the years it was a New York C corporation, back when Petitioner was a New York resident.

Petitioner and his family had been New York residents from 1975 until 1991, when they relocated to Virginia. The decision was made in 1990 - for a better climate and because Azab no longer had sales in New York - and they bought a Virginia home in December 1990. They listed their New York house for sale in early 1990, moved most of their belongings to Virginia in April 1991, but kept the children in New York school until June 1991. After school let out they vacationed, stopped briefly in New York for a wedding, then settled into their Virginia home; the kids started Virginia school for the 1991-92 year, and the New York house sale finally closed in late December 1991. On their accountants' advice, Petitioner and his wife filed as full-year New York residents for 1991, for simplicity, even though the actual move happened mid-year.

Petitioner asked the Department three questions. First, now that Azab is again both a federal and (pending) New York S corporation, are dividends paid out of its accumulated New York C-corporation earnings taxable to him as a nonresident shareholder for New York personal income tax purposes? Second, if he buys another business in New York, does that purchase affect his residency status under three scenarios: (A) he moves back to New York in August 1992, (B) he moves back in 1993, or (C) he runs the new business from Virginia and never moves back? Third, if he doesn't buy the New York business at all and simply remains in Virginia, will he be treated as a New York nonresident?

The Department answered the first two questions directly. On dividends, Tax Law § 631(b)(2) sources income from intangible personal property - including dividends - to New York only to the extent the underlying property (here, the Azab stock) is employed in a business carried on in New York. Since Petitioner's stock isn't used in a New York business, a dividend representing a distribution of Azab's accumulated earnings from its New York C-corporation years is not New York-source income to him as a nonresident, regardless of the fact that Azab itself once earned that money doing business in New York. On the second question, the Department held flatly that purchasing a business in New York, by itself, does not affect Petitioner's resident or nonresident status - none of the three sub-scenarios changes that baseline conclusion.

The third question - and the underlying question behind all of it, whether Petitioner has actually changed his domicile to Virginia and become a New York nonresident for a given year - the Department declined to answer. Citing Tax Law § 171 Twenty-fourth and 20 NYCRR § 2376.1(a), the Department explained that an Advisory Opinion can only apply the law to the facts presented, and whether someone has truly changed domicile is a factual determination, not a legal one, so it cannot be resolved this way. Instead, echoing its companion opinion issued about three weeks earlier - Haythe & Curley, Adv Op Comm T&F, July 13, 1992 (TSB-A-92(5)I) - the Department directed Petitioner to apply the Tax Law § 605(b) resident/nonresident tests, the domicile regulations at 20 NYCRR § 105.20, and relevant case law to work out his own residency status.

What this means for you

Shareholders of New York corporations who move out of state

If you move out of New York and your corporation later distributes earnings it accumulated while it was a New York C corporation, those dividends are not automatically New York-source income to you just because the corporation once did business here. Under Tax Law § 631(b)(2), dividend and other intangible-property income follows the location where the stock itself is used in a business - and for a passive shareholder, that generally means the income isn't New York-source at all once you're a nonresident, even if the underlying earnings were generated in New York years earlier.

People who left New York but keep a business foothold here

Buying, owning, or operating a business in New York does not by itself make you a New York resident or otherwise change your residency status - this holds whether you move back to New York right away, move back later, or never move back and simply run the business remotely. Residency turns on the separate domicile and permanent-place-of-abode/day-count tests in Tax Law § 605(b), not on where your business interests happen to be located.

Anyone claiming a mid-year change of domicile

The Department will not decide, in an Advisory Opinion, whether you've actually changed your domicile in a given year - that is treated as a question of fact outside the scope of what an Advisory Opinion can resolve. You (and your accountant) need to work through the Tax Law § 605(b) statutory tests, the 20 NYCRR § 105.20 domicile regulations, and the relevant case law yourself to determine your residency status, and be prepared to support that determination with the facts of your move (timing of the home purchase and sale, when belongings and family actually relocated, school enrollment, and similar indicators).

Common questions

Q: Why weren't the dividends from Azab's accumulated earnings taxable to Petitioner as a nonresident?
A: Tax Law § 631(b)(2) sources income from intangible personal property - like dividends, interest, and gains on intangibles - to New York only to the extent that property is employed in a business, trade, profession, or occupation carried on in New York. A dividend is income from the stock, not from the corporation's underlying operations; since Petitioner's Azab stock wasn't itself employed in a New York business, the dividend fell outside New York-source income even though the earnings being distributed were originally generated while Azab was a New York C corporation.

Q: Does it matter that Azab is now (again) an S corporation for both federal and New York purposes?
A: Not for this particular question. The dividend at issue was a distribution of earnings accumulated during years Azab was a New York C corporation - a corporate-level pool of earnings and profits that predates any pass-through S-corporation treatment. The Department's sourcing analysis turned entirely on where the stock was employed in a business, not on Azab's current corporate tax election.

Q: If Petitioner buys a business in New York and later moves back to New York, does the business purchase itself trigger residency?
A: No. The Department held that purchasing a business in New York does not, by itself, affect resident or nonresident status under any of the three scenarios Petitioner described (moving back in August 1992, moving back in 1993, or never moving back and running it from Virginia). Residency is governed by the separate domicile and permanent-place-of-abode tests, not by where you own or operate a business.

Q: Why wouldn't the Department just tell Petitioner whether he was a New York nonresident?
A: Under Tax Law § 171 Twenty-fourth and 20 NYCRR § 2376.1(a), an Advisory Opinion can only apply the law to a specific, agreed-upon set of facts - it cannot resolve disputed or open factual questions. Whether someone has actually abandoned their old domicile and established a new one is inherently a factual inquiry (weighing things like where you bought and sold homes, when you actually moved belongings and family, and where children attend school), so the Department left that determination to Petitioner, pointing him to the governing statutory and regulatory tests instead of deciding it for him.

Q: What is the Haythe & Curley opinion the Department cites here?
A: Haythe & Curley, Adv Op Comm T&F, July 13, 1992 (TSB-A-92(5)I) is a companion Advisory Opinion issued about three weeks before this one, addressing the same "domicile change is a question of fact" principle. The Department relied on it here as precedent for declining to make a domicile determination and for directing taxpayers to apply the Tax Law § 605(b) tests and domicile regulations themselves.

Citations and references

• Tax Law § 601(e)(1) - sets the tax allocation formula for nonresidents and part-year residents, taxing New York-source income as a fraction of what a full-year resident would owe
• Tax Law § 631(b)(2) - sources income from intangible personal property (dividends, interest, annuities, gains on intangibles) to New York only to the extent the property is employed in a New York business
• Tax Law § 605(b)(1) - defines a "resident individual" via the domicile test and the permanent-place-of-abode/183-day test
• Tax Law § 605(b)(2) - defines a "nonresident individual" as someone who is not a resident or part-year resident
• Tax Law § 171 Twenty-fourth - limits Advisory Opinions to applying the law to the specific facts presented
• 20 NYCRR § 2376.1(a) - regulation confirming Advisory Opinions cannot resolve disputed factual questions
• Haythe & Curley, Adv Op Comm T&F, July 13, 1992 (TSB-A-92(5)I) - companion opinion holding that a domicile change is a question of fact outside the scope of an Advisory Opinion

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a92_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-92(7) I
Income Tax
August 7, 1992

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I920428C

On April 23, 1992, a Petition for Advisory Opinion was received from
Mahmoud M. Mahmoud, 10917 Woodland Falls Dr., Great Falls, Virginia 22066.
The issues raised by Petitioner, Mahmoud A. Mahmoud, are (1) whether
dividends paid from accumulated New York C corporation earnings, by a federal S
corporation which is now a New York S corporation, to nonresident shareholders
are subject to New York State personal income tax; (2) how his residency status
is affected by purchasing a business in New York
(A)

if he moves back to New York in August of
1992;

(B)

if he moves back to New York in 1993;

(C)

if he operates the business from Virginia
and does not move back to New York; and

(3) will he be a nonresident of New York if he does not buy the New York business
and he stays in Virginia.
Petitioner owns 40% of Azab & Company, Inc. (hereinafter "Azab"), his wife
owns 40% and his children own the remaining 20%. Azab was incorporated in New
York State in November 1984.
In September 1985, Azab became a federal S
corporation. Azab was a New York C corporation from the date of incorporation
through 1987. Azab elected New York S corporation status for 1988 and 1989. For
1990 and 1991 Azab was a New York C corporation, but has applied for New York S
corporation status for 1992.
Azab had earnings from New York sources only in
taxable years 1988 and 1989. Azab has no sales in New York and owns no property
in New York. Azab has retained earnings from taxable years during which it was
a New York C corporation and Petitioner was a resident of New York.
Petitioner and his family were New York State residents from 1975 until
1991 when they moved to Virginia.
In 1990, Petitioner decided to move to Virginia because the climate was
better and Azab no longer had any sales in New York. In December of 1990,
Petitioner and their family purchased their new home in Virginia. In early 1990,
Petitioner listed their house in New York for sale and most of their belongings
were moved to Virginia in April of 1991.Petitioner stayed in New York only until
his children finished school in June.
After school let out Petitioner and his family went on vacation, stopped
briefly in New York for a wedding and then went to their home in Virginia.
Petitioner's children started school in Virginia as of the beginning of the 1991­
92 school year. In late December of 1991 the sale of Petitioner's house in New
York closed.

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TSB-A-92(7) I
Income Tax
August 7, 1992
On the advice of his accountants in New York and Virginia, Petitioner and
his wife filed as full year residents of New York in 1991 for simplicity.
Section 601(e)(1) of the Tax ]Jaw provides that personal income tax is
imposed for each taxable year on the taxable income which is derived from sources
in New York State of every nonresident or part-year resident individual which
shall be equal to the tax computed under section 601(a) through (d) of the Tax
Law, as the case may be, reduced by the credits permitted under section 606(b)
and (c) of the Tax Law, as if such nonresident or part-year resident individual
were a resident, multiplied by a :fraction, the numerator of which is such
individual's New York source income determined in accordance with sections 631
through 638 of the Tax Law and the denominator of which is such individual's
federal adjusted gross income for the taxable year.
Section 631(b)(2) of the Tax Law provides that income from intangible
personal property, including annuities, dividends, interest, and gains from the
disposition of intangible personal property, shall constitute income derived from
New York sources only to the extent that such income is from property employed
in a business, trade, profession, or occupation carried on in this state.
Accordingly, if Petitioner is a nonresident of New York and he receives a
dividend that represents a distribution of Azab's accumulated earnings and
profits from taxable years Azab was a New York C Corporation, such dividend is
not New York source income pursuant to section 631(b)(2) of the Tax Law.
Section 605(b)(1) of the Tax Law defines a "resident individual" as an
individual (1) who is domiciled in New York State unless the individual maintains
no permanent place of abode in New York State, maintains a permanent place of
abode elsewhere and spends in the aggregate not more than thirty days of the
taxable year in New York State or (2) who is not domiciled in New York State but
maintains a permanent place of abode in New York State and spends in the
aggregate more than one hundred eighty-three days of the taxable year in New York
State.
Section 605(b)(2) of the Tax Law defines a "nonresident individual" as an
individual who is not a resident or a part-year resident.
Petitioner's purchase of a business in New York State will not affect
Petitioner's resident or nonresident status.
The determination of whether
Petitioner has changed his domicile and is a nonresident of New York for a
particular taxable year is a question of fact not susceptible of determination
in an Advisory Opinion. An Advisory Opinion merely sets forth the applicability
of pertinent statutory and regulatory provisions to "a specific set of facts".
Tax Law, §171. Twenty-fourth; 20 NYCRR 2376.1(a). Therefore, a determination
cannot be made in an Advisory Opinion as to whether Petitioner has changed his
domicile to Virginia and is a nonresident of New York for a particular taxable
year.

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TSB-A-92(7) I
Income Tax
August 7, 1992
However, as stated in Haythe & Curley, Adv Op Comm T&F, July 13, 1992,
Petitioner should apply the rules as set forth in section 605(b) of the Tax Law
and section 105.20 of the Income Tax Regulations as well as pertinent case law
to determine whether Petitioner is domiciled and/or a resident of New York State.

DATED: August 7, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.