As the demand for government services increases, so do state and local governments’ appetite for tax revenues. In recent years we have seen more instances where two states claim the same taxpayer as a resident for tax purposes. More often, the situation occurs when a taxpayer claims to have changed his legal domicile but continues to maintain two residences or spends time in the original state. Recently an administrative law judge for the New York Division of Tax Appeals ruled against one such couple.
Donald and Rose Lieberman claim to be residents of Florida. The Sunshine State is one a handful of states with no broad based income tax. (The others are Tennessee, Wyoming, New Hampshire, Alaska, South Dakota, Texas, Washington and Nevada.) Like many snowbirds, the Liebermans lived part of the year in New York and part year in Florida. With the couple in their 80’s, it is easy to make an argument that they had retired to Florida.
New York’s tax authorities, however, disagreed. When the parties couldn’t reach an agreement, the Liebermans were assessed over $100,000 in income taxes.
Income tax nexus cases are very fact specific. Adding to the problem is that the taxpayer who claims a switch in domicile often bears the burden of proof – in other words, “guilty until proven innocent”. The state claiming domicile will want to view daily credit card receipts in order to determine how many days the taxpayer was in each state. New York, like many states, says that if you spend more than half the year – 183 days or more – you can be deemed a resident for tax purposes. Good audit defense depends on maintaining a calendar and receipts to show residency.
The examination usually doesn’t end there, however.
The taxing state also examines car registrations, hunting and fishing licenses, driver’s license, voter registration and even club memberships. To mount a good audit defense, it is important to properly document your connections to the other state. For example, if you live in both New York (high taxes) and Florida (no income tax), being able to show you vote in Florida is critical.
In this case, even though the Liebermans registered to vote and registered their cars in Florida, the still judge ruled they had not abandoned New York as their legal domicile. Why?
The judge articulated two primary reasons. First Mr. Lieberman continued to return to New York to manage his investment properties which were located there. Having a business interest in the former state makes for a difficult domicile argument.
Second, the judge said, “What is glaringly missing, other than the purchase of houses in Boca Raton, was any evidence of an intent to change their domicile to Florida. There was no mention of a daily routine in Florida, much less a social life. There was not a range of sentiment, feeling and permanent association established with Florida.”
If you are planning to move to a low or no tax state, simply obtaining a drivers license in your “new” home state is not enough if you continue to have significant ties to your former domicile. The burden of proof is on the taxpayer to show a change in domicile. Simple things like not registering to vote in the new state or trying to save a few bucks by purchasing a “resident” fishing license in your old state can prove instantly fatal. Not keeping good records can also lead to problems as well.
If you feel that you have been assessed taxes, interest and penalties based on an improper domicile, give us a call. Our audit defense lawyers can help with the audit and any subsequent appeals. We also help clients with domicile and tax planning to avoid future problems. All inquiries are protected by the attorney – client privilege and kept in strict confidence. For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct).
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Minneapolis, Minnesota; Portland, Maine and San Francisco, California. Legal services available in all jurisdictions.
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Posted by Brian Mahany, Esq