Ohio Residency: Bright-Line and Common-Law Tests

How does one become an Ohio resident?

It’s not hard, I suppose. One could just buy a house in Ohio and live there.

How does one stop being an Ohio resident?

That one is a bit trickier. I would probably start by selling that same house and moving. It is a simple solution, but not one tailored to the needs of the snowbirds. I would not mind being a snowbird. Call me crazy, but I could separate myself from Cincinnati winters and spend that time in better weather.

Let’s say that you live in Cincinnati. You have a second home in Ft. Myers, Florida and a great deal of discretion as to how much time you spend in each state. You would like to move your “residency” to Florida, as Florida does not have an income tax. You still have friends and family in Cincinnati, however, so you intend to keep your house here. Can you do so and still be considered a Florida resident?

Of course you can.

Ohio is not one of those states that will chase you down to the ends of the earth to tax you years after you have left.

But that doesn’t mean there aren’t rules to follow.

And someone recently thought that those rules did not apply to them. The case is Cunningham v Testa. Let’s talk about it.

We have talked before about the idea of “domicile” in state taxation. Domicile is easy for the vast majority of us. We have one house, and we live there with our family. We have one house, one abode, one domicile. A house gives one an “abode,” and if one is fortunate one can afford more than one abode. Domicile rises above that. Domicile wants to know which abode is one’s true home: the one with the pencil markings measuring the kids’ height over the years, the squeaky floorboard at the top of the steps, the cold corner in the living room that never really warms up no matter how one sets the thermostat.

Domicile wants to know which abode is that house. You know - your home. The concept borders on the mystical.

Ohio is one the states that looks at domicile when determining whether one is a resident or nonresident. Ohio doesn’t care about that house in Florida. That is just an abode until one raises it to the level of domicile.

Remember that Ohio has a tremendous number of snowbirds. In years past the state expended a not-insignificant amount of resources reading tea lives and consulting Tarot cards to figure-out whether or not someone was an Ohio resident. Ohio needed something less employee-intensive.

Ohio decided to use a “bright-line” test and would henceforth look at “contact periods.” If one had enough contact periods it would consider one a resident. If not, it would consider one a nonresident … unless there were other factors indicating that one was a resident.  

For the most part it was now an arithmetic exercise. The “… unless” part was there to prevent one from gaming the count.

COMMENT: A contact period occurs if (1) one is away from his/her domicile (2) overnight and (3) is in Ohio for all or part of two consecutive days.  It is not the same as sleeping overnight in Ohio, as the test is not where one sleeps. One could book a hotel in Covington, Kentucky for example, and cross the bridge into Ohio in the morning. If one crossed the bridge for two consecutive days, there would be a contact period.

Ohio added up the contact periods. If there were at least 183, then Ohio considered one a resident.

            NOTE: Starting in 2015 that count has been raised to 213.

Back to the Cunninghams.

He filed an “Affidavit of Non-Ohio Domicile” for tax year 2008, using his name, social security number and Cincinnati address. She did not file anything.

COMMENT: Mrs. Cunningham is immediately out-of-the-game.

He declared he was a resident of Tennessee, although he did not give an address.   

            COMMENT: That did not help.

Nonetheless, filing the Affidavit shifted the burden to Ohio.

And Ohio responded by issuing a notice and then an assessment.

The Cunninghams appealed.

Time to show your cards, Ohio.

(1)   Cunningham and his wife were raised in Ohio and raised their children there.

COMMENT: Fail. What else do you have, Ohio?

(2)   He listed his Ohio address on his tax return.

COMMENT: Dumb but not fatal.

(3)   He had his Tennessee utility bills forwarded to Cincinnati for payment.

COMMENT: Same as (2), although I am wondering who was in Cincinnati to pay the bills if they were in Tennessee.

(4)   He maintained an Ohio driver’s license.

COMMENT: That guy, he is such a procrastinator …

(5)   He voted in Ohio during the year.

COMMENT: Did no one advise this guy?

(6)   He did not present a calendar of contact periods.

COMMENT: He’s got this ADD thing with paperwork …

(7)   He filled-out paperwork to obtain homestead exemption on his Cincinnati residence.

COMMENT: Really?! I mean it, REALLY???

Let’s just say that the Tax Commissioner persuaded the Ohio Supreme Court that any affidavit Cunningham filed was bunkum. Cunningham was an Ohio resident under common-law tests. The bright lines rules – while invaluable – are not an absolute defense against the common-law tests for residency.

There has been some hyperventilation in the wake of this decision. Here is an example from the Ohio Society of CPAs:

This ruling will encourage even more litigation whenever the commissioner decides to challenge an affidavit as ‘false,’ and will render almost meaningless the recent increase in allowable contact periods from 182 to 212.”  

No, no it doesn’t, and I greatly doubt that Ohio wants to get into repetitive shootouts with taxpayers on this issue. That is why Ohio moved to a bright-line standard in the first place.

Just have some common sense out there, folks.

Limited Delay In ObamaCare Employer Mandate

Let’s touch again on the latest change to ObamaCare.

You may remember than last July, the IRS postponed the “Section 4980H shared-responsibility penalty” to 2015. Its original effective date was 2014.

CLARIFICATION: The 4980H shared responsibility penalty is the $2,000/$3,000 ObamaCare penalty levied on employers. The penalties apply if (1) you do not offer health insurance or (2) the government does not consider the health insurance you do provide to be adequate.

NOTE: This is a separate penalty from that levied on you personally should you not carry insurance. The way ObamaCare is constructed (at least presently), both the employer and employee can wind up paying penalties.     

OBSERVATION: And these penalties will wind up on someone’s individual or business tax return, which is why we are talking about them in a tax blog.

On February 10, 2014 the IRS further delayed the 4980H penalty for employers having 50 to 99 full-time equivalent employees in 2014. These employers now have an additional year – until 2016 – to offer health insurance to their employees.

I am going to have to put up a chart on my office wall to keep track of all the delays and changes.

Let’s recap the “new” revised rules for employer compliance with the 4980H penalty:

(1)  Employers with less than 50 full-time equivalent employees do not have to pay the penalty or file additional reports with the IRS - ever.

a.     There has been no change for this employer tier.

(2)  Employers with 50 to 99 full-time equivalent employees (FTEs) will have to file reports with the IRS in 2015 but will not have to pay any penalties until 2016.

a.     That is a change.

b.    But … see below.

(3)  Employers with over 100 FTEs have to provide health insurance. They will also have to file reports and possibly pay penalties in 2015.

a.     But the hurdle for the penalties has changed.

b.    The new hurdle is 70% employee coverage for 2015 and 95% coverage in 2016 and later years.

                                                              i.     There is a small break here.

Then there is something odd.

Let’s go back to Tier 2 employers - those with 50 to 99 FTEs.

If this is you, you will have to sign an affidavit that you did not reduce the size of your workforce below 100 to take advantage of the additional one-year delay. The IRS does allow you to explain yourself, though, if you did:

For example, reductions of workforce size or overall hours of service because of business activity such as the sale of a division, changes in the economic marketplace in which the employer operates, terminations of employment for poor performance, or other similar changes unrelated to eligibility for the transition relief provided in this section XV.D.6 are for bona fide business reasons and will not affect eligibility for that transition relief.”

Tier 2 employers will be required to maintain a “comparable” level of health benefits as existed on February 9, 2014 in order to obtain relief.

OBSERVATION: Interestingly, if the Tier 2 employer did not offer health insurance on February 9, 2014, then this requirement is automatically met.

So … you will have to sign a form saying it was not the president’s fault that people lost their jobs.

I suppose it will be the tooth fairy’s fault.