The Supreme Court – Once Bitten Twice Taxed Revisited

SALT Chat

09.28.15 | SALT Chat

So I have been at Berdon for almost 20 years now and one of my oldest, most popular and unfortunately largely still true articles was entitled, “Once Bitten, Twice Taxed.”  It discusses the pitfalls of dual residency for individual taxpayers and how despite the credit mechanisms in place, taxpayers can still be subject to tax in more than one state on their intangible income (interest, dividend, capital gains.)

Let’s take the classic case of the hedge fund manager who lives in Connecticut with his wife, three children and family dog, but has a summer home in New York State.  Mr. Hedge Fund Manager comes to work in New York City virtually every single day (certainly more than 183), using the summer home for no more than two weeks a year.  Mr. Hedge Fund Manager is going to be domiciled in Connecticut and is a statutory resident of New York State.  He is in for a big surprise when New York sends him a tax bill for all of his unearned income (his carried interest in the fund and any other intangible income).  The credit mechanism won’t help as New York and Connecticut both will claim that this income is sourced to their state.

Enter the Supreme Court in the recent Wynne decision (see our recent Client Alert).  Some commentators believe that the Supreme Court invalidated such a taxing scheme, though the facts of the case had largely nothing to do with the situation described above. Maybe it’s too early to tell, but I can assure you the States will be fighting tooth and nail on this.  What should a taxpayer do?  Certainly, where the amount of double taxation is significant, taxpayers should consider filing protective refund claims for open years

Questions? If you need help understanding how dual residency can impact your taxes, please contact us.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.