Originally published on Forbes.com Sept 2nd, 2013
According to a recent decision from the North Carolina Department of Revenue (DR), despite their deep roots in the state, Steve and Elizabeth Fowler had long considered becoming Florida residents. But the matter of domicile took on new urgency in late 2005, when Mr. Fowler signed a letter of intent to sell a 60% stake in the contracting company that he had built – Commercial Grading, Inc (dba Fowler Contracting)- for $106 million. If you or one of your clients, is considering a domicile shift in anticipation of a liquidity event, this case is a must read. The Fowlers’ legal team did a really good job before an administrative law judge (ALJ), who found in their favor, but things went downhill from there.
The final agency decision went against them resulting in a bill for more than $10 million, including interest, penalties and some gift taxes. The final decision is a detailed edit of the ALJ decision. Reading the decision you get to see how the same set of facts can be used to construct different domicile narratives.
Clearly the team representing the Fowlers did a great job of constructing a narrative that supported the argument that they had changed their domicile. DR’s revised narrative points out the weakness in the steps that the Fowlers took. The main lesson is that you need to work on the domicile change before it becomes urgent. It would be easy to Monday morning quarterback the steps that were taken between November 2005 and January 2006, but during that period of time, the negotiations for the sale of the stake in the business were live and transition planning had to be going on. In that context, the domicile change would seem like a relatively small detail. Still $6,325,106 in income tax for 2006 and 2007 is a number that merited a bit more attention.
It Was An Uphill Battle To Begin With
The biggest misconception about domicile change is that it is a simple matter of filing some paperwork to get a new drivers license and voter registration in your target state. If you are continuing to have significant connections to the state that you are leaving and the state you are leaving is motivated to hang on to you, the argument becomes a fact intensive dispute that borders on the mystical, since domicile is a matter of intent, but your intent is demonstrated by your actions. The North Carolina standard is fairly typical:
“To effect a change of domicile there must be (1) an actual abandonment of the first domicile, accompanied by the intention not to return to it and (2) the acquisition of a new domicile by actual residence at another place, coupled with the intention of making the last acquired residence a permanent home.”
The biggest problem that the Fowlers were facing is that Mr. Fowler needed to keep working at his business, which was totally based in North Carolina. Mr. Fowler was present in North Carolina for at least part of the day 213 days in 2006 and 204 days in 2007. Since the Fowlers kept their house in Raleigh, similar facts would have doomed them if they had been trying to break free of Massachusetts or New York. They would be statutory residents, taxable regardless of domicile. North Carolina, on the other hand, has a presumption that you have not changed if you spend more than 183 days in North Carolina. You do not get a favorable presumption, if you spend less than 183 days (Heads, they win. Tails, it’s a push.)
The Planning
It does appear, understandably given everything else that was going on, that the planning around the domicile change took a back seat. It was critical that the Fowlers be Florida residents before the sale of the company closed, but they thought they had an incentive to cut it close because of the Florida intangibles tax.
The Intangibles Tax was assessed on Florida residents based on the fair market value of their intangibles (stocks, bonds, etc.) as of January 1). The rate of 1/2 a cent per thousand does not sound like that much, but given that his partial stake in the company was going for over $100,000,000, Mr. Fowler’s total intangibles might have produced a tax of over $1,000,000. Ironically 2006 was the last year for the Intangibles Tax on individuals. More interestingly, as described in this article, short term trust gimmicks had by then virtually repealed the tax for people with significant wealth. I remember a Florida attorney telling me that allowing a high net worth individual to pay significant intangibles tax bordered on malpractice.
The Domicile Change Day
The manner in which the same facts support different narratives can be seen by contrasting the ALJ presentation of the events of January 20, 2006 with the presentation of DR. First the ALJ :
On January 20, 2006, Petitioners left for Naples Florida on a chartered plane at 5:03 a.m. Upon arrival there, the Fowlers ate breakfast, went to the local government center to inquire about getting driver’s licenses and registering to vote, and went to a local driver’s license office. At the driver’s license office, Petitioners presented their North Carolina licenses and asked for Florida driver’s licenses. Petitioners were unable to obtain Florida driver’s licenses that day because they did not have further identification papers requested by Florida authorities. For the same reason, Petitioners were unable to register to vote. Petitioners were able, however, to register a car that they had moved to Florida previously. Petitioners moved a second car to Florida later in 2006. Also on January 20, 2006, Petitioners went to a local post office to obtain a post office box. They did not succeed in doing so on January 20 because none was available in the size desired. On January 20, Petitioners attempted to register their dog, but could not do so because they did not have the dog’s vaccination records present.
So the ALJ narrative is that the day after signing the agreement to sell the stake in the business (but not closing), the couple immediately followed through by trying to register to vote and get drivers license and register the dog. The fact that some bureaucratic technicalities got in the way is of no account.
DR sees it differently:
On January 20, 2006, Steve Fowler was unable to get a Florida driver’s license or register to vote because he did not have his passport, social security card or birth certificate, which were all located in his personal safe in Cary, North Carolina, not at the Tiburon property in Naples, Florida. On January 20, 2006, Steve Fowler was unable to register his dog because the dog’s vaccination records were located at the Old Stage Road property in Raleigh, North Carolina.
My friend Phil Dardeno, who works on a lot of domicile cases, once told me that it is really important where all the family pictures are. Apparently the dog’s vaccination records can carry similar emotional freight.
Other Issues
There were several more issues. There was quite a bit of discussion as to whether the 2.8 million dollar home in Raleigh was really nicer than the 1.6 million dollar home in Naples. The DOR pounced on the fact that the Naples home was purchased before Mrs. Fowler looked at it. The ALJ noted that great effort went into looking for hangar space and sophisticated maintenance services in Naples. What impressed DR was that in January 2006, Mr. Fowler took delivery on a $19.2 million dollar plane which was parked in Raleigh. Also quite a few of the trips to places other than Naples began and ended in Raleigh.
Practice Pointer
Changing domicile was a relatively small part of a big picture for the Fowlers, but still represented quite a bit of money. They might have done well to get a specialist involved earlier in the process.
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