Typically, this column addresses federal income tax implications, but state income taxes may be a concern, too. For instance, a taxpayer may try to establish residency in one state over another because of lower income tax rates. In two new cases, one taxpayer emerged victorious in such an endeavor, while the other was turned down.
The winning case is Bicknell, KS Dist. Ct. 2017-CV-000131-P, 3/5/19. The case where the taxpayer ended up on the losing end is McManus, NY DTA No. 8271116, 2/7/19.
Case #1: The decision culminates a decade-long battle between the state of Kansas and a nationally known pizza chain magnate.
The taxpayer, who once owned more Pizza Hut restaurants than any other franchisee in the country, sued the state over a $42 million tax bill for the sale of his franchises in 2006. He argued that he had established residency in Florida, where there is no state income tax.
According to the lawsuit, the taxpayer filed tax returns as a Florida resident and a Kansas non-resident for the 2003, 2004 and 2005 tax years. He claimed that he has maintained a home, bank accounts, driver’s license and voter registration in Florida since 2003. But Kansas pointed out that the taxpayer kept important contacts within the state, including the Kansas home he still owned and connections with his alma mater, his church and various charities.
Now the Kansas district court has overturned a prior ruling and said that the taxpayer is a Florida resident. Based on the facts, it determined that his ties to Florida were stronger than those to Kansas. But we may not have heard the last word on this matter: An appeal is being contemplated.
Case #2: The taxpayer in this case is a stockbroker who initially both worked and lived in New York. However, in 2008, he accepted a job in St. Louis, Missouri, and worked there through the end of 2009. Because the family spent weekends at another home in Connecticut, where the taxpayer kept certain valuables, he argued that he was a Connecticut resident in 2009.
However, the taxpayer’s children continued to go to school in New York, and their address was listed there. The IRS auditor also discovered from bank statements, credit card statements, flight information, EZ pass records and phone records that the taxpayer spent 45 days exclusively in New York, 40 days exclusively in Connecticut and 105 days exclusively in St. Louis during 2009.
After assessing all the information, the auditor found that there was a “continuous and consistent presence” of the taxpayer and his family in New York in 2009, even though they gathered together in Connecticut for weekends and holidays as well as summer recess. Furthermore, because the taxpayer continued to seek employment in New York throughout 2009, the auditor said that the state remained prominent in his career.
Accordingly, the New York district court has now ruled that the taxpayer is a New York resident in 2009 for income tax purposes. He owes the personal income tax deficiency of $53,000, plus interest and penalties.
If any of your clients is in a similar position, the more ties to the preferred state of residence the better. Build a case that can stand up to scrutiny.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...