William and Eleanor Kania owned homes in both Pennsylvania and Florida. They thought they were residents of Florida. The Pennsylvania Southwest Regional Tax Bureau thought they were Pennsylvania residents. The Court of Common Pleas agreed with the Kanias, but the Bureau was persistent and appealed to the Commonwealth Court. Mr. Kania is a CPA with a practice in Pennsylvania, but he mostly worked from Florida. State income taxes were not at issue in the case, as he had paid Pennsylvania on his share of the practice’s income as a non-resident. Local income taxes can only be assessed on residents, however. The Bureau was seeking taxes, interest, penalty, attorney fees and costs totaling $25,000. How they got it to work out to an even number is beyond me. The Court upheld the Common Pleas decision. Sorry to spoil the suspense. There is a really great discussion in the case, though, which is why I thought it was worth sharing.
There are a lot of misconceptions about residence for income tax purposes. The biggest misconception is that it can be boiled down to one or more mechanical tests. The Kania case gets into the complexity. The most important concept is domicile. Domicile is somewhat difficult to grasp, it sometimes seems to border on the mystical. I’m going to go literary on you here. Nowadays, when people talk about an “odyssey”, they are referring to a journey, perhaps metaphorical as in Odyssey of the Mind, that somebody chooses to embark on. The story of the Odyssey is nothing like that. Odysseus did not want to go anywhere. He pretended to be insane to avoid going off to fight at Troy, but it did not work, so off he had to go. He was at Troy for ten years, until the war was ended by his clever trick and then he headed back home for Ithaca. His many misadventures in that process make up a good part of the story of the Odyssey. I make the argument in this piece on my bizzaro blog that an appropriate title for the poem might have been “Schlepping Back From Troy”. Here is the point. For that whole twenty year period, even the seven years where he was dallying with Calypso, Odysseus had only one domicile – Ithaca, where he started from and where he always wanted to return.
Here is how the Court explains domicile:
The place where a person lives and has a permanent home and to which the person has the intention of returning whenever absent. Actual residence is not necessarily domicile, for domicile is the fixed place of abode which, in the intention of the taxpayer, is permanent rather than transitory. Domicile is the voluntarily fixed place of habitation of a person, not for a mere special or limited purpose, but with the present intention of making a permanent home, until some event occurs to induce the person to adopt some other permanent home.
Mr. Kania had owned a home in Florida since 1982, but it was only in 1998 that he decided to take the steps to change his domicile:
Kania offered a copy of his Florida voter registration card, which was dated June 13, 1998, and testified that he has voted in every election in Florida since 1998. He has not voted in Pennsylvania since 1997. Kania testified that he has two vehicles that are registered in Florida; has a Florida driver’s license; uses his Florida address on tax filings; and maintains his bank accounts in Florida.
Kania explained that he serves on numerous professional, political and charitable boards in Florida, and he has done so since 1998. By contrast, he has resigned from the boards of numerous Pennsylvania authorities, including the North Fayette County Municipal Authority, the Airport Authority, the North Union Township Sewage Authority, the Fayette County Industrial Development Authority, and the North Union Township Planning Authority. These resignations were all effected by 1999.
Finally, Kania explained that he spends 55 percent of the year in Florida, 35 percent in Pennsylvania and 10 percent traveling, both for business and pleasure. Generally, he and his wife go to Florida in October and remain there until the following May. However, they return to Pennsylvania for Thanksgiving and Christmas to spend time with their family. Between June and October, they go back and forth between Florida and Pennsylvania, and they also travel for vacation and for business.
Taxing authorities can be pretty picky in challenging a taxpayer’s domicile. The Bureau certainly was with the Kanias:
The Bureau argues that the evidence showed that Kania’s Florida home is simply a winter residence. Further, in his 2002 letter to the Bureau, Kania used the word “residency,” not “domicile,” to refer to his time in Florida, and he repeated this terminology in his testimony. This evidence, the Bureau argues, directly undermines the trial court’s holding that Kania is domiciled in Florida
I call that the “He didn’t say ‘Simon says'” argument. The Court was not having it:
It was appropriate for Kania to refer to his Florida “residence” in his 2002 letter to the Bureau, and there is no reason to infer that he used the word in a technical and legal sense that would exclude domicile. Indeed, it is clear that the purpose of Kania’s letter was to inform the Bureau that he was not domiciled in Pennsylvania.
Then there was an error on his return:
The Bureau then makes much of the fact that Kania’s Pennsylvania state income tax returns used a local residency code. Kania explained that he does not prepare his own taxes and simply had not noticed the local tax code on the returns. In any case, those returns also list his home address as being located in Florida. The Bureau believes, apparently, that the local residency code trumps the Florida address and shows, conclusively, that Kania is domiciled in Pennsylvania. However, it does not support this belief with any legal authority. If relevant at all, the use of the code was one, of many factors, to consider.
Some preparers have an irresistible impulse to answer every question even if it is not relevant or possibly it may have been a case of just carrying over the same code from year to year without reflecting on it.
Then there was the evidence issue:
The Bureau first notes that Kania’s documentary evidence does not cover each year between 2001 and 2005. These documents include Kania’s 1998 voter registration card, a 2005 sample bank statement, his 2008 Florida driver’s license, and a 2008 dues invoice from the Florida Institute of Certified Public Accountants. The Bureau believes that Kania should have produced these documents for each of the tax years in question. Stated otherwise, the Bureau contends that Kania’s oral testimony is not sufficient to prove factual findings. We disagree.
The Court noted that it was fine for Common Pleas to take Mr. Kania’s word.
Those three items, however, indicate how careful you need to be in arguing a domicile case. Probably someone with expertise in the issue should have looked at the letter that was sent to Florida. A non-resident return should get some extra scrutiny if you think residence might be challenged. And there is no reason not to bury the auditors with paper rather than giving them a small sampling. There is some chance that Mr. Kania could have avoided a court fight, but it is difficult to say. It is amazing the stuff that auditors will come up with in fighting domicile cases. Mass DOR had to caution auditors that they were hurting local charities by using donations from people who had moved to Florida against them. I even remember there being reference to cemetery plots, but that may have been apocryphal.
The Literary Observation
I really do think the Odyssey is an ideal way to illustrate the concept of domicile, but it may be on my mind, because of something I got from my son. He is starting college this week and one of the first things he was tackling was the Epic of Gilgamesh, which he characterized as “The Original Bromance”. I thought that was even better than calling the Odyssey “Schlepping Back From Troy”. As far as how the meaning of odyssey developed into the current understanding of something that you might choose to do, it may be that Tennyson is to blame.
You can follow me on twitter @peterreillycpa.
Originally published on Forbes.com on August 28th, 2012