Originally published on Forbes.com June 4th, 2013
Jerome James is not beloved by Knicks fans, so they may not be sorry to hear that California recently nabbed him for almost four hundred grand. Still, it is an instructive story for those who follow domicile cases, even those, like me, who have no interest in basketball.
Jerome James started his NBA career with the Sacramento Kings. Between the NBA lockout and injuries, he did not play that much for them. They waived him in October 2000. He played in Europe for a while and then signed with the Seattle SuperSonics. He may have been thinking that there was an unstated bonus for playing in Seattle. Washington does not have a personal income tax, while California has one of the most onerous. A recent decision (sorry I can’t find a free link) by the California Board of Equalization must have disappointed him. The Board found that for all of 2003 and part of 2004, he was still a California resident. The total tab for the two years was nearly $400,000.
The Stickiness Of Domicile
What Mr. James ran afoul of is what I have taken to calling the stickiness of domicile. People think that changing your state of residence is a pure act of will, perhaps accompanied by a flourish of paperwork. It is true that some states, like New York, will count you a resident based on a mechanical day counting test, but that is what makes someone a “statutory resident”. Somebody who is a statutory residents of New York, because he works in the financial district as a master of the universe and has a nice apartment on the upper east side, where his mistress lives, might also be a resident of New Jersey or Connecticut, where he has a vast estate and a family. The latter would be his domicile.
The concept of domicile can border on the mystical. Fundamentally, everybody has a domicile. Most significantly, for someone like Mr. James, you cannot successfully claim to have abandoned your old domicile until you have established a new one. Mr. James had an argument that California had never become his domicile at all (He grew up in Florida), given his short stint with the Kings. He might have made that work, but for some non-career factors.
Appellant purchased a home, purchased and registered a vehicle, attained a California driver’s license, filed a tax return as a California resident listing his California address, and was starting a new family. Even though appellant was released by the Kings, with no indication of whether he would ever play for the Kings or any other California-based NBA team, appellant continued to retain his California connections leading up to the years at issue in this appeal. Therefore, appellant became a California domiciliary at some point prior to the 2003 tax year.
A couple of kids and a house makes for a domicile, so California had him. The question then becomes how long California gets to keep him. There is a serious problem for Mr. James at this point. Once California has him as a domiciliary, the burden of proof shifts to him to prove that he has established domicile someplace else.
Appellant contends that he changed his domicile to Washington when he signed a two-year contract with the Supersonics in September of 2001, with the second year being at appellant’s option, and rented a furnished home for only the duration of the NBA season.
Like many high stakes domicile cases, this one got into an immense amount of detail. It appears that real estate and family ended up being the most determinative factors
Appellant owned two homes in Sacramento, and rented different furnished apartments in the Seattle area strictly for the duration of the NBA seasons. Appellant’s first son lived with him or his mother in Seattle, depending on whether appellant was travelling with the team or at home, and then Jamarcus lived in Sacramento with him during the summer. Ms. Jackson and appellant’s second and third sons all lived in California, and appellant asserts that he returned to California during the summer to be with them. The factors in this section generally aid in determining when a taxpayer is in or out of the state. In this appeal, it is known that appellant is generally only in Seattle during the NBA season and in California during the offseason. While the NBA season is longer than the offseason, the other factors in this section show that appellant had stronger permanent ties to California in the form of property and family.
Should You Fire Your Lawyer And CPA When You Move?
Financial professionals in high tax states might find some of the discussion a little disturbing.
Respondent asserts that appellant maintained the use of professionals located in California throughout the audit period. Respondent contends that, from at least late 2002 to 2004, appellant used a Sacramento accounting firm and legal services from a Sacramento firm, and in 2003 used services from a family law attorney in California.
I imagine that they have already figured this out, but firms based in high tax states that represent high income athletes should probably be looking to open offices in places like Orlando.
Quo Vadis ?
Mr. James went on to play for the Knicks – kind of. Apparently, he is not a favorite of Knicks fans, if this story is any indication:
After a brief burst in the playoffs, James was signed to an outlandish contract with the Knicks. It was lambasted the day it was made, and the critics were more than vindicated. James was thrilled with the big money, so much so that he decided to quit working out, and he reported to camp overweight and indifferent. The highlight of his Knicks career came in 2005-2006, when he averaged 3 PPG. In his final two years on the Knicks he scored a grand total of 10 points.
Of course, what really interests me is whether he fell into the same trap in New York that he did in California. If this 2010 picture of his Florida home is any indication, he may have gotten it right this time.
You can follow me on twitter @peterreillycpa.