An October ruling by the New York Tax Appeals Tribunal is another example and reminder that if you are thinking of changing residency from a high-tax state to a low-tax state, it is crucial to have a careful and well-thought-out plan. Certain states are aggressively increasing enforcement and targeting high-income earners and their plans to relocate purely for tax purposes. 

The decision in Matter of John J. Hoff & Kathleen Ocorr-Hoff (DTA No. 850209) demonstrates that domicile is determined by the “lifestyle of the taxpayer,” not simply with a checklist of administrative filings. It was argued that the Hoff’s remained domiciled in New York despite significant efforts to establish a Florida “paper trail”. Several traditional steps to signal a change in residency were completed including obtaining Florida driver’s licenses, registering to vote in Florida, filing formal “Declarations of Domicile” and limiting their New York presence to under 165 days in a given tax year.

Despite these actions, it was argued that the primary factors of domicile remained in New York and while secondary factors, such as the ones that were completed, show a path to relocation, it is insufficient if the New York lifestyle is not substantially abandoned. The court dismissed the taxpayers’ formal declarations as “self-serving” and “documentary proof” that failed to negate the intent to return to New York.

New York law places the burden of proof on the taxpayer to demonstrate, by clear and convincing evidence, an intent to change domicile. This requires showing the abandonment of the former domicile and the acquisition of a new, permanent domicile.

To help mitigate the risk of potential back taxes, interest and substantial penalties, taxpayers should consider the five primary factors of domicile.

The Home Factor

Auditors compare your New York residence to your new residence. If you retain a New York home, the new home must be your primary “base of operations.”

• Is the new residence comparable in size and value to the New York residence?
• Is the new home furnished for year-round living (rather than a vacation home)?
• Have you significantly decreased the use of the New York home (“closing it up” for the season)?
• Do you host holidays and family gatherings at the new residence?

Active Business Involvement

Even if you are physically elsewhere, your “intellectual presence” in a New York business can anchor your domicile there.

• Have you retired or significantly diminished your day-to-day management of New York businesses?
• If you still work, is your primary office located in the new state?
• Have you updated your corporate filings and business cards to reflect the new address?

The Time Factor

Auditors look for a “lifestyle shift.” Simply spending 184 days outside New York is not enough if your time in the new state is still less than your time in New York.

• Do you spend more time in the new state than in New York?
• Do you maintain a thorough travel log (using apps, flight records, or credit card statements)?
• Has your pattern of time changed significantly compared to prior “resident” years?

Items “Near and Dear” (The Teddy Bear Test)

The law assumes you keep your most treasured possessions where you are domiciled.

• Have you moved family heirlooms, photo albums and fine art to the new home?
• Are your pets (and their veterinary records) located in the new state?
• If you have a collection (wine, cars, stamps), is the bulk of it housed at the new residence?

Family Connections

While less weight is given to adult children, the location of a spouse and minor children is a primary indicator.

• Do your minor children attend school in the new state?
• If married, does your spouse also maintain a primary presence in the new state?
• Are you involved in social, religious or community organizations in the new location?

Oxford can provide experienced support in navigating the planning, documentation and strategic decisions associated with residency changes. Many individuals become enamored with the potential tax-savings and think changing some administrative items will be sufficient. However, we continue to see that high-tax states like New York and others are going to challenge these scenarios, making it important to have documentation and steps in order.

Source: https://www.dta.ny.gov/pdf/decisions/850209.dec.pdf

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