By Josh Barbanel 

New York officials railed against "double taxation" after the U.S. Congress tax overhaul limited how much residents could deduct in state and local taxes from their federal tax bill.

But that didn't stop New York from imposing a $10 million bill for back taxes and interest on a Connecticut hedge-fund manager, who also paid taxes to Connecticut on the same income.

That assessment was the largest deficiency imposed in several decades on any taxpayer who was found to be a "statutory resident" of New York state, while living elsewhere, according to Robert Willens, a tax and accounting consultant who publishes a tax newsletter.

A New York administrative law judge found in December that David Russekoff, a hedge-fund manager who lives in Greenwich, Conn., owed about $9 million in taxes and $1 million in interest on investment income because he was considered a "statutory resident" of New York too.

The ruling said he owed New York taxes on income earned in New York, Connecticut taxes on earned income in Connecticut. He owed taxes to both on "intangible" investment income that wasn't linked to any specific place, the ruling added.

The case is the latest in a series of challenges to the way New York taxes investment income for wealthy individuals who live outside the state. The provision has vexed tax lawyers to the rich for many years, but they have failed to get relief in the courts or the legislature.

Mr. Russekoff is a former investment manager and former chief investment officer at a Manhattan-based hedge fund, Perry Capital, which made large gains from bets against subprime mortgages during the last housing boom.

In 2009, he moved from a penthouse on the Upper East Side to a sprawling home on a lake in Greenwich, Conn. For four years, beginning in 2010, he earned more than $90 million in gains on the sale of securities, including $60 million in 2013 alone, according to the tax appeals decision.

But Mr. Russekoff was caught up in New York state's tax system because he still owned a five-bedroom waterfront vacation home on Shelter Island, a five-minute ferry ride from the Hamptons on the east end of Long Island, and spent more than 183 days in New York state each year.

Roger Blane, an attorney at Hutton & Solomon LLP, who represented Mr. Russekoff and his wife, Amanda, said he believed that the tax on investment income violated "the plain meaning" of a provision of the New York state constitution.

That provision stated that intangible investment income should be taxed at the "domicile of the owner" for tax purposes, which in the case of Mr. Russekoff was Connecticut.

But the tax court, citing a 1998 State Court of Appeals decision, found that investment income was "intangible" and not tied to any place and couldn't be considered out-of-state income. It denied a credit for taxes paid to Connecticut.

"The location of the intangible personal property is not relevant to the imposition of tax in this case," the decision by Administrative Law Judge Dennis M. Galliher said.

In October, the U.S. Supreme Court declined to hear two other cases brought by two couples living in Connecticut, who also faced New York tax.

Timothy P. Noonan, a tax lawyer at Hodgson Russ LLP who represented both taxpayers, said that the Supreme Court was unlikely to take up the issue until similar challenges arise in other states.

"It is a bit of double standard that New York is against double taxation when it comes to the state and local tax deduction but not in cases like these."

As for Mr. Russekoff, he left Perry Capital in 2015 and formed his own hedge fund in 2017, Smith Cove Capital, now a family office. It was based in Greenwich, rather than in New York.

Write to Josh Barbanel at josh.barbanel@wsj.com

(END) Dow Jones Newswires

January 27, 2020 09:26 ET (14:26 GMT)