Originally Published on forbes.com on August 27th, 2011
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One of the most difficult things to grasp in state taxation is the concept of domicile. Most states tax residents on their world wide incomes and non-residents on income earned in that state. Most states will give their residents acredit for taxes paid to other states usually limited to the amount of tax that the home state grabbed on that particular income. (If you live in a low tax state and work in a high tax state the low state tax will not credit you the full amount of tax you pay to the high tax state.) It’s not all that hard to figure out for parochial people like myself. For more mobile people, though it can get pretty complicated with sometimes surprising results. You see whether you are a resident of a state is not determined simply by physical presence. If you went on an around the world cruise for a year while letting a relative live rent free in your house in Massachusetts and returned to the house, you would not get to skip paying Massachusetts income tax that year. Even though you spent no time in Massachusetts during that year, you did not change your permanent home, your domicile. That is about the simplest example I could come up with to illustrate the principle. This Rhode Island case of an unnamed taxpayer, whom I will call Lois Lane, illustrates the messy complexity of domicile.
When someone is methodically trying to establish that they have changed state residence they can get a check list of “indicia” from an attorney. Two of the biggies are voter registration and drivers license. They are not determinative, but they are important. It reminds me of what my friend Paul Deprisco told me about passing the CPA exam many years ago. It doesn’t do that much for you, but they hold it against you if you don’t. A couple who wants to win a Massachusetts to Florida domicile case won’t win just because they promptly changed their voter registration and drivers license. On the other hand they might lose because they never quite got around to it. These two particular indicia are a problem for ex-patriates though.
Lois Lane graduated from college in 1995 and started looking for overseas work. She found a job in Japan and pretty much stayed there. She maintained a joint account with her mother in Rhode Island, her Rhode Island drivers license and voted in elections under her Rhode Island voter registration. In 15 years, she was never in Rhode Island except for an occasional Christmas visit. Her mother would generally go overseas to visit her. In the case of an expatriate maintaining a drivers license and continuing to vote are not generally thought to be indicia of maintaining domicile in the state that they shoved off from. Expatriates are citizens of the United States. Because of our complex system of fragmented sovereignty, they need to send their vote for President of the United States to one of the states.
At any rate, somehow the Rhode Island taxing authorities took note of the fact that Lois was filing a federal tax return using a Rhode Island address and not filing a Rhode Island return. So they investigated. They didn’t have a problem with most of the 15 years, but they did have a problem with two. You see Lois decided to get a Masters degree from Columbia University, so she lived in New York for two years. During those two years she didn’t spend much more time in Rhode Island than she did when she was living in Japan. Being moderately familiar with both Providence and Manhattan, I don’t find that particularly shocking. If you are in Sutton Massachusetts, where I used to live, going to the Providence Mall is a pretty big deal and Providence is often the best airport to use. Also a Pawsox game is a much better value than going to Fenway Park. If I was living on the upper West Side, though. and Mom liked to visit there I don’t think I’d be heading for Rhode Island all that often.
Anyway it would seem that being within two hundred miles of Rhode Island for two years and not going there much would be pretty strong evidence that she had abandoned her Rhode Island domicile. That’s not how the tax authorities saw it though. They figured that since she probably could have gotten a New York drivers license and voted in New York, that for the two years she was in New York she should be conisdered to be domiciled in Rhode Island where she had those two indicia. I’m not making this up (other than her name being Lois Lane). I don’t have that much imagination.
The hearing officer went with the taxpayer on this one:
In closing, the Division is concerned that an expatriate taxpayer could spread his or her state contacts around and not pay state income tax. If the Taxpayer had taken a job in New York so that she was effectively permanently in New York and the United States, her continued contacts with Rhode Island would count for more. However, the Taxpayer was only in New York temporarily and that finding is based on the fact she was studying for a terminal degree (a M.A.) and is not based on a declaration that was made by the Taxpayer only after receiving the notice of a tax liability. In other words, the degree is an objective manifestation of the intent that she only intended to temporarily study in another state.
Even though she prevailed this must have been a lot of aggravation. I had an idea of how to avoid the aggravation and ran it by my partner Mike O’Connor , who has a lot of expatriate experience. He agreed that if she had been reasonably able to establish Florida domicile before going to Japan she would have avoided the whole problem without giving up the right to vote. That would have also allowed her to be part of the drama of the presidential election in 2000. I understand that they deliver mail in Japan, so the convenience address with Mom might have been a bad tactical move.
Ironically even if Rhode Island had been able to claim Lois as a resident, based on domicle, New York would still have had a claim on her for that period. New York follows, invented really, the concept of statutory resident. If you spend 183 days in New York (and a day means any part of a day) and have a place to stay in New York, New York considers you a “statutory resident” even if it concedes you don’t have New York domicile. I discussed some of the nuances of that in a post titled You Can be Two Places at Once if One of Them is New York. Actually I don’t know if New York invented the concept, but it is called the New York rule even though other states, including Massachusetts, have adopted it. At any rate if you are a hedge fund manager working on Wall Street and living in Montclair, you will want to maintain your mistress or boy toy in Weehawken rather than Greenwich Village, if you don’t want to pay New York State and City taxes on your carried interest.
