INDIVIDUAL INCOME TAX INSIGHTS: BREAKING UP IS HARD TO DO. KANSAS WILL NOT LET GO OF PIZZA HUT MAGNATE AND HIS $42 MILLION

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A common strategy for avoiding state income taxes is to move to a state with no state income tax.  That sounds easy enough, right?  Not exactly.  As Khloe Kardashian teaches us, moving on is difficult. 

Just ask Gilbert Hyatt about his 22 year-old battle with the California Franchise Tax Board.  His dispute began with his move to Nevada.  His case has since evolved into more than a dispute over tax residency and domicile.  The U.S. Supreme Court will hear oral arguments on Dec. 7 regarding the board’s challenge of at least $1 million in punitive damages, according to a Daily Tax Report story.  The damage award stems from the board’s tortious conduct during Hyatt’s tax residency audit.  This is the second time the case reached the U.S. Supreme Court.

Now, it’s O. Gene Bicknell’s turn in the tax residency audit hot seat.  Despite Bicknell’s claim of Florida residency for the 2005 and 2006 tax years, the Kansas Department of Revenue assessed $42 million for the 2006 sale of his interest in NPC International, as reported by The Topeka Capital-Journal.  The crux of the assessment hinged on the Kansas Court of Tax Appeals’ common law determination that Bicknell is a Kansas resident.

In the case’s second appearance before the Kansas Court of Appeals, the court ruled in favor of the Pizza Hut franchise owner.  The lower court ignored and failed to apply domicile tax regulations in determining Bicknell’s resident status, the court said.  Unabashedly, the lower court expressly disregarded the regulations and “essentially reasoned that the regulations are meaningless because they are simply a reflection of existing statutory and caselaw.”  The Kansas Department of Revenue filed a petition for review Oct. 23 in Bicknell, as reported by Priya D. Nair in Bloomberg BNA’s Daily Tax Report.  

Like most states, residency status in Kansas is determined by an individual’s domicile.  Domicile is more than physical presence.  It is a person’s permanent place of abode – a place where a person intends to return following any absence.  A person can only have one domicile at any particular time. 

Most states, such as Kansas, take a multi-factor approach in determining domicile.  Common factors include but are not limited to:  where a person is registered to vote; the state that issued a person’s driver’s license; the state a person registered his or her motor vehicle and the physical location of such vehicle; and the location of services performed in the course of employment. 

Domicile litigation tends to be fact intensive.  For example, the Virginia Department of Revenue issued several domicile rulings this year.  However, the Bicknell case differs from most domicile cases in that it involves allegations of unconstitutional regulations and a court’s erroneous application of the law. 

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn:  Is domicile a tax loophole for the wealthy?

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