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.

Is It A Bad Thing To Be A Resident Of Two States At The Same Time?

A state tax issue came up with a client recently, and I was somewhat surprised by another CPA’s response.  The issue arises when someone has tons of interest and dividend income – that is, big bucks, laden with loot, banking the Benjamins.  Since I consider myself a future lottery winner, it also means something to me.

Here it is:

           

Can you be a resident of two states at the same time?

The other CPA did not think it possible.

There are a couple of terms in this area that we should review: domicile and place of abode. Granted in most cases they would mean the same thing. For the average person domicile is where you live. You are a resident of where your domicile is located. We future lottery winners however frequently will have multiple homes.   I intend to have a winter home (New Mexico comes to mind), a summer home (I am thinking Hawaii) and, of course, one or more homes overseas. Which one is my domicile? Now the issue is not so clear-cut.

OBSERVATION: Let’s be honest: this is a high-end tax problem.

Domicile is your permanent home. It is the place to which you intend to return when absent, to which your memories return when away, it is home and hearth, raising children, Christmas mornings and planting young trees There can be only one. A domicile exists until it is superseded, and there can never be two concurrent domiciles. It is Ithaca to Odysseus. It took Odysseus ten years to get home from Troy, but his domicile was always Ithaca. The concept borders on the mystical.

A place of abode can be an apartment, a cottage, a yacht, a detached single-family residence. There can be more than one. I intend to have abodes in New Mexico, Hawaii and possibly Ireland. My wife may pick out another one or two.

Most states (approximately 30, I believe) use the concept of “domicile” to determine whether you are or are not a “resident” of the state. You can generally plan for these states by pinning down someone’s “main” house.  A state can tax all the income of a resident, which is what sets up the tax issue we are talking about.

Then you have the “statutory” states, among the most aggressive of which is New York. New York will consider you a resident if:

(a)  Your domicile is New York, or

(b) Your domicile is not New York, but

a.     You maintain a permanent abode in New York for more than 11 months of the year, and

b.     You spend more than 183 days in New York during the year

That “or” is not there because New York wants to be your friend. That (b) is referred to as statutory residency. It is intentional, and its intent is to lift your wallet.

How? It has to do with all those interest and dividends we future lottery winners will someday have.

Let’s say that you live in Connecticut and work in White Plains. You are going to easily meet the “more than 183 days in New York” test. Unless you work at home. A lot. Let’s say you don’t.

We next have to review if you have a “permanent abode.” What if you have a vacation home in the Hamptons. What if you have an apartment in Brooklyn. What if you rent an apartment (in your name) for your daughter while she is attending Syracuse University. Do you have a permanent abode in New York? You bet you do. The “permanent” just means that it can be used over four seasons. We already discussed the meaning of “abode.”

Think about that for a moment. You may never stay at your daughter’s apartment. It will however be enough for New York to drag you in as a statutory resident because you “maintain” it.  New York doesn’t care if you ever actually stay there – or even step foot in it.

Great. You are a resident of both Connecticut and New York.

So what, you think. Connecticut will give you a credit for taxes paid New York. New York will give you a credit for taxes paid Connecticut. The accountants’ fee will be wicked, but you are not otherwise “out” anything, right?

Wrong. You may be “out” a lot, and it has to do with those interest and dividends and royalties and capital gains – that is, your “investment income.”

There is a state tax concept called “mobilia sequuntur personam.” It means “movables follow the person,” and in the tax universe it means that movable income (think investment income, which can be “moved” to anywhere on the planet) is taxed only by one’s state of residence. The system works well enough when there is only one state in the picture. It may not work so well when there are two states.

The reason is the common technical wording for the state resident tax credit. Let’s look at New York’s wording as our example:

A resident shall be allowed a credit …for any income tax imposed for the taxable year by another state …. upon income both derived therefrom and subject to tax under this article."

The trap here is the phrase “derived therefrom.” Let’s trudge through a New York tax Regulation to see this jargon in its natural environment:

           

The term income derived from sources within another state … is construed as ... compensation for personal services performed in the other jurisdiction, income from a trade, business or profession carried on in the other jurisdiction, and income from real or tangible personal property situated in the other jurisdiction."

Well, isn’t that a peach? New York wants my interest and dividend income to be from personal services I perform (that’s a “no”), from a trade, business or profession (another “no”) or from real or tangible property (again a “no”).

New York will not give me a resident credit for taxes paid Connecticut.

That means double state taxation. 

Yippee.

Can this be constitutional? Yes, unfortunately. The Supreme Court long ago decided that the constitution does not prohibit two states reaching the conclusion that each is the taxpayer’s state of residence. The Court stated:

“[n]either the Fourteenth Amendment nor the full faith and credit clause … requires uniformity of different States as to the place of domicile, where the exertion of state power is dependent upon domicile within its boundaries.” (Worcester County Trust Co v Riley)

What did we advise? The obvious advice: do NOT be in New York for more than 183 days in a calendar year NO MATTER WHAT. 

Our client’s apartment is in Manhattan, so she also gets to pay taxes to New York City on top of the taxes to New York State. I hope she really likes that apartment.

BTW New York is NOT on my list of states for when that future lottery comes in.