Minnesota Income Tax Residency Law— Recent Developments and Planning Considerations

On April 16, 2014, the Minneapolis Star Tribune published an article by Adam Belz titled, “Minnesota’s wealthy caught in a tight tax net over residency.” The article discussed the Minnesota Department of Revenue’s approach to residency determinations, as well as two recent Minnesota Supreme Court residency decisions. Although the article served as a reminder that the Department of Revenue continues to aggressively pursue residency audits, it provided an incomplete discussion of Minnesota income tax residency law that may have left readers with a mistaken impression of how that law is, and should be, applied. See “Counterpoint” article prepared by our colleague, Mary Streitz, and published by the Star Tribune on April 23, 2014, available here.

To further clarify the points addressed in the Star Tribune piece, this article summarizes Minnesota income tax residency law and discusses the impact of the recent court decisions applying that law. Additionally, this article describes the process of changing domicile and the steps individuals should take if they wish to leave Minnesota and establish domicile in another state.

Current Law

Under current law, a person is treated as a resident for Minnesota income tax purposes if (1) the person is domiciled in Minnesota or (2) the person is domiciled outside of Minnesota but maintains a place of abode in the state and spends in the aggregate at least 183 days of the year in Minnesota. See Minn. Stat. § 290.01, subd. 7.

For purposes of this rule, “domicile” means presence in a place with the intention of making it a permanent home. Domicile is also the place where, whenever a person is absent, the person intends to return. In other words, domicile is the location that serves as the center of a person’s life. Importantly, once a domicile is established, it is presumed to continue until it is proven that (1) the former domicile has been abandoned, and (2) a new domicile has been created.

Minnesota’s income tax regulations list 26 factors that are considered in determining whether a person is domiciled in Minnesota. See Minn. R. 8001.0300, subp. 3, available here. The regulations explicitly state, and Minnesota courts agree, that no one factor, by itself, will determine a person’s domicile. See Minn. R. 8001.0300, subp. 3.

Recent Cases on Domicile

Two recent Minnesota Supreme Court decisions illustrate how Minnesota courts apply the 26 factors to weigh a taxpayer’s facts and circumstances and to determine whether the taxpayer has established domicile in another state.

In Larson v. Commissioner of Revenue, 824 N.W.2d 329 (Minn. 2013), taxpayer William Larson argued that he had changed his domicile from Minnesota to Nevada in 1998 after taking actions to physically relocate to Las Vegas—he purchased and homesteaded a condominium, moved the bulk of his personal belongings, obtained a Nevada driver’s license, registered to vote, registered vehicles and opened a Nevada bank account. Despite these actions, the Minnesota Supreme Court agreed with the Minnesota Tax Court that “the locus” of Mr. Larson’s life remained in Minnesota and therefore Mr. Larson had failed to carry his burden. The court emphasized that, during the tax years at issue, Mr. Larson “owned more property in Minnesota than he did in Nevada, spent more time in Minnesota than he did in Nevada, registered more vehicles in Minnesota than Nevada, and maintained bank accounts and mail delivery in Minnesota.” Id. at 332. Based on the totality of the circumstances, the court was unable to conclude that the center of Mr. Larson’s life was in Nevada.

Similarly, in Mauer v. Commissioner of Revenue, 829 N.W.2d 59 (Minn. 2013), the Minnesota Supreme Court upheld the Minnesota Tax Court’s determination that taxpayer Kenneth Mauer did not change his domicile from Minnesota to Florida. Mr. Mauer, an NBA referee who traveled extensively for his job, argued that he had established his domicile in Florida after purchasing a townhome in Fort Myers in July 2003 and taking other formal steps to change his domicile. The Minnesota Supreme Court found that even though Mr. Mauer declared that he changed his domicile in July 2003, the overall facts and circumstances, including his actual behavior, showed otherwise.

The court found it significant that Mr. Mauer continued to call Minnesota his “home” in his travel logs, and he maintained, furnished, and spent significantly more time in his 10,600-square foot home in Minnesota, than he did in his Fort Myers townhome. Id. at 76. The court’s domicile analysis also highlighted that most of Mr. Mauer’s flights began and ended in Minnesota and his Minnesota home contained most of his motor vehicles and personal belongings. Id.

Impact of Recent Cases

The discussion and comments in the April 16, 2014, Star Tribune article may have given the impression that the Larson and Mauer decisions have significantly altered the domicile analysis in Minnesota. In our experience, however, these cases have not materially changed the Department of Revenue’s domicile position or its analysis of the 26 factors. In fact, the courts’ decisions have reinforced the long-standing rule that no one factor is determinative in the domicile analysis and that all relevant facts and circumstances will be considered and weighed.

In particular, although both the trial and appellate courts in Larson noted Mr. Larson’s use of Minnesota professionals after purporting to change his domicile to Nevada, this was merely one of many facts cited by the court, and certainly not the most important one. A taxpayer’s long-distance relationship with established Minnesota advisors should not tip the domicile analysis in the Department of Revenue’s favor.

Although the “location of business relationships and the place where business is transacted” is one of the factors the Department of Revenue considers in its 26-factor analysis, see Minn. R. 8001.0300, subp. 3T, in our experience the Department has generally looked only at a taxpayer’s business relationships that have significant connections with Minnesota and has not focused on a taxpayer’s professional advisors. To clarify any confusion in interpreting this factor, however, a bill is currently pending in the Minnesota legislature, HF 3167, Article 3, Section 8, which provides that neither the Department nor the courts may consider “the location of an individual’s attorneys, certified public accountants, or financial advisors” in determining the individual’s domicile for Minnesota income tax purposes.

Process of Changing Domicile

Contrary to the impression with which one might have been left after reading the Star Tribune article, a person does not need to sever all ties with Minnesota to establish domicile elsewhere. Rather, as the Minnesota Supreme Court noted in Mauer, “there are several well-established, reasonable, and concrete steps that a taxpayer can take in order to establish domicile.” 829 N.W.2d at 76. There are also many individually tailored steps a taxpayer can take to solidify a change of domicile. Based on our experience with the Department of Revenue, some examples include:

  • Spend more time in the new state than in Minnesota.
  • Begin and end most travel from the new state of residence (or, next best, somewhere other than Minnesota).
  • Don’t maintain a home in Minnesota that is larger and that has more personalized décor than the home in the new state of residence. For example, move important personal belongings to the home in the new state of residence and keep the Minnesota home furnished as more of a seasonal property.
  • Establish real and substantial social and community connections in the new state of residence. Keep a record of activities, especially those that would be unusual if the new state of residence was seasonal, i.e., volunteer work, club and other social network activities, church activities, blood donation, etc.

These are the types of considerations on which the Department of Revenue would focus to develop and analyze the unique set of facts and circumstances that point to the location of a taxpayer’s domicile. Careful and early planning is critically important. Our extensive experience both in advising clients who are contemplating a residency change and in representing taxpayers whose residency change has been challenged has provided us with the insight and knowledge necessary to help our clients establish and defend the strongest residency position possible.


 

Topics:  Audits, Department of Revenue, Domicile, Residency Requirements, Residency Status, Tax Planning

Published In: Civil Procedure Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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