On February 1, 2016, the Minnesota Department of Revenue (the “Department”) issued Revenue Notice # 16-01 (available here), in which the Department explains how it will view the location of a taxpayer’s attorneys, accountants, and bank accounts in its evaluation of a taxpayer’s intent to establish, retain, or abandon domicile in Minnesota.
The Notice states that (1) “[e]mploying, hiring, or engaging an attorney or CPA, or who has a business relationship with an attorney or CPA, whose address is in Minnesota, does not, by itself, demonstrate an intent to establish or retain domicile in Minnesota,” and (2) “[h]aving one or more bank accounts located in Minnesota, does not, by itself, demonstrate an intent to establish or retain domicile in Minnesota.”
This article provides general background on Minnesota income tax residency law, discusses recent legislative and Department efforts to clarify whether the location of a taxpayer’s attorneys, accountants, and bank accounts is relevant to the domicile analysis, and ultimately questions whether the new Revenue Notice accomplishes what taxpayers and their representatives were expecting.
General Background
A person is treated as a resident for Minnesota income tax purposes if (1) the person is domiciled in Minnesota or (2) the person is domiciled outside of Minnesota but maintains a place of abode in the state and spends in the aggregate at least 183 days of the year in Minnesota. See Minn. Stat. § 290.01, subd. 7. For purposes of this rule, “domicile” means presence in a place with the intention of making it a permanent home. Domicile is also the place where, whenever a person is absent, the person intends to return.
Minnesota’s income tax regulations list 26 factors that are considered in determining whether a person is domiciled in Minnesota. See Minn. R. 8001.0300, subp. 3 (available here). These regulations have been in effect and unchanged since at least 1981. The regulations explicitly state, and Minnesota courts agree, that no one factor, by itself, will determine a person’s domicile. See Minn. R. 8001.0300, subp. 3. That no one factor is determinative, therefore, has been established law for decades.
Under the 26-factor analysis, the location of a taxpayer’s bank accounts, especially the location of the most active checking account, is considered in determining a taxpayer’s residency. See Minn. R. 8001.0300, subp. 3Q.
The location of a taxpayer’s attorneys and accountants is not referenced in any of the 26 factors. The Department, however, has interpreted the “location of business relationships and the place where business is transacted,” see Minn. R. 8001.0300, subp. 3T, to encompass all types of contacts and relationships, including a taxpayer’s relationships with attorneys and accountants. The Department’s interpretation has caused confusion among taxpayers and their professional (oftentimes, personal) advisors. This confusion has led many professional and financial organizations to seek a legislative solution.
Recent Legislative and Department Efforts to Clarify the Business Relationships and Bank Accounts Factors of the Domicile Test
Because of the confusion surrounding the business relationships factor, a bill was introduced in the Minnesota Legislature during the 2014 legislative session prohibiting the Department and courts from considering the location of a taxpayer’s attorneys, certified public accountants, or financial advisors in determining the taxpayer’s domicile for Minnesota income tax purposes. Although the changes were not included in a final bill, the discussions during the 2014 legislative session caused the Department to initiate a review of Minnesota residency laws and how the Department has applied them in the past.
On March 13, 2015, the Department released its “2015 Residency Report” (available here) to the Minnesota Legislature, which explains its current processes and procedures in residency cases. The report is based on information and feedback the Department gathered during listening sessions conducted with various professional and financial organizations. In the report, the Department recognized that it considers professional and business associations as a factor in determining an individual’s domicile. However, consistent with the substantial feedback received from many professional and financial organizations, the report states:
[The Department] will issue a Revenue Notice based on the current law and rule that clearly states the following:
- The mere physical location of a CPA or Attorney providing services is not a factor in determining residency.
- The department will not look at the location of bank accounts when determining residency.
Minnesota Department of Revenue, 2015 Residency Report, at 10 (emphasis added). This declaration seemed promising to taxpayers and their professional advisors because it would have established that the Department did not view the physical location of attorneys, accountants and bank accounts as a relevant domicile consideration.
During the 2015 legislative session, bills were introduced to clarify that the location of a taxpayer’s professional advisors and financial accounts has no bearing on the residency analysis and should therefore not be considered. Both the Senate and the House included language in their respective omnibus tax bills (SF 826 and HF 848) that would modify the current domicile test under Minn. Stat. § 290.01, subd. 7, by prohibiting the Department and courts from considering the physical location of an individual’s attorney, certified public accountant, or financial advisor in determining where an individual is domiciled for Minnesota income tax purposes. The bills also prohibit consideration of the place of business of a financial institution where an individual applies for any new type of credit or at which the individual opens or maintains any type of account.
The tax bills were sent to a conference committee last May, but the conference committee disbanded at the end of the legislative session without passing an omnibus tax bill. Since the legislative session ended without a law addressing these issues, the Department moved forward with drafting and issuing a Revenue Notice as described in its 2015 Residency Report.
Effect of New Revenue Notice
The language in Revenue Notice #16-01 is inconsistent with the Department’s description of such notice in its 2015 Residency Report issued last March—namely, that report states that the forthcoming Revenue Notice will establish a rule “that clearly states” that “[t]he mere physical location of a CPA or Attorney providing services is not a factor” and that “[t]he department will not look at the location of bank accounts.” (Emphasis added.) Instead, the Revenue Notice confirms that from the Department’s perspective, the location of attorneys, accountants and bank accounts is a relevant factor in the domicile analysis, but “does not, by itself demonstrate an intent to remain in Minnesota.” As has always been the case since the 26 factors were promulgated decades ago, no one factor, by itself, establishes domicile—the Department’s Notice does not add anything new or helpful on this point. Although this may provide reassurance for a taxpayer whose only contact in Minnesota is that taxpayer’s attorney or CPA, this does not provide the clarification necessary. Simply stated, hiring a Minnesota professional advisor is irrelevant to the domicile determination and should therefore not be considered.
Since the Revenue Notice does not address the goal of the language in the omnibus tax bills from the 2015 legislative session, we can expect to see the language from those bills resurface in the upcoming 2016 session. If enacted, the legislation would change how the Department and Minnesota courts currently apply the domicile test. It would also provide needed certainty for taxpayers and their advisors on excluding the location of an individual’s professional advisors and financial accounts from the current domicile considerations. If that language is not enacted and taxpayers and their professional advisors are left with Revenue Notice #16-01 as their only guidance, questions remain about how certain aspects of the Revenue Notice will be interpreted by the Department.
If you would like additional information or have any questions about how the Minnesota residency laws apply in your particular circumstances, please contact us.