Counterpoint: Clarifying the facts around where you live for tax purposes

by Dorsey & Whitney LLP

Residency rules haven’t changed. Now a bill lets exiles keep their Minnesota professional advisers.

As a Minnesota tax lawyer for nearly 30 years, I read with interest the Star Tribune article April 16 (“Avoiding state tax net is no easy task”). I understand why Minnesota’s income tax laws are a current topic of conversation, given last year’s enactment of a new, higher marginal tax rate for higher-income Minnesotans. The article, though, perpetuates some common misconceptions about Minnesota’s income tax residency law:

1) The article states that “It’s getting tougher for Minnesotans to avoid the state’s taxes by spending part of the year somewhere else.” Minnesota’s income tax residency law has not gotten tougher — it has been the same for years. Since enactment of Minnesota’s income tax in 1933, “domicile” has always served as the touchstone for determining residency. The long-standing definition of “domicile” at common law — maintaining a permanent abode in a place coupled with the intention to make it your permanent home — has been used in Minnesota’s income tax regulations at least since 1981. These regulations also set forth a list of 26 items that will be considered in determining whether a person is domiciled in Minnesota, a list that has remained the same at least since 1981.

2) The article quotes Minnesota lawyer Matt Shea as saying, perhaps facetiously, that “You can come [to Minnesota] any time you like, but you can never leave.” This is, of course, not the case. Once you’ve established Minnesota as your domicile for income tax purposes, you can always leave and establish a new domicile in another state — if you really mean to do so and your actions are consistent with that intent. And if you do establish a new domicile in another state, you can maintain a secondary home here without being considered a Minnesota resident as long as you do not spend 183 or more days during the tax year in Minnesota.

3) The article states that “A court decision last year reinforced the state’s ability to use any of more than two dozen criteria to determine who is a Minnesota resident” (emphasis added). But the regulations enumerating the 26 items that will be considered in determining an individual’s domicile explicitly state — and have stated at least since 1981 — that “Any one of the items listed above will not, by itself, determine domicile.”

4) The article portrays the same court decision and another one decided last year, involving taxpayers William Larson and Kevin Mauer, as establishing a shift in Minnesota income tax residency law. To the contrary, these individuals lost their cases under timeworn legal rules: The trial court looked at the relevant facts and circumstances and concluded that the taxpayers’ actions were not consistent with their stated intentions to establish new domiciles in other states. In both cases, the individuals continued to spend far more time in Minnesota than in their claimed new domiciles, and given this fact alone, it is not surprising that the court concluded that the individuals did not meet their burden of proof.

5) It is unfortunate that Shea believes, as the article reports, that he “can’t argue with” his clients who fired his law firm because they worried about the impact of using Minnesota lawyers after relocating to another state. True, both the trial and appellate courts in Larson’s case noted Larson’s use of Minnesota lawyers and accountants after claiming to move his domicile to Nevada, but this was just one of many facts cited by the court — and hardly the most important one — in determining that Larson remained domiciled in Minnesota.

Minnesota is home to many world-class law firms, public accounting firms and financial advisory firms with clients domiciled throughout the United States. It would be foolish and should be unnecessary to fire your trusted advisers here just because you have moved to another state, especially if you continue to need advice on questions within their areas of expertise.

HF 3167, a bill pending in the Minnesota Legislature, would clarify that the location of an individual’s attorneys, CPAs or financial advisers will not be considered in determining the individual’s domicile for Minnesota income tax purposes.

I support passage of this legislation to encourage the engagement of Minnesota professional advisers by individuals in other states and to quell any concern that hiring a Minnesota adviser could be a basis for determining that they are subject to Minnesota income tax.

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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